Monthly Archives: January 2025

Cybersecurity Disclosure Overview: A Survey of Form 10-K Cybersecurity Disclosures by S&P 100 Companies

Posted by Stephenie Gosnell Handler, Julia Lapitskaya, and Michael A. Titera, Gibson, Dunn & Crutcher LLP, on
Thursday, January 9, 2025
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Stephenie Gosnell Handler, Julia Lapitskaya, and Michael A. Titera are Partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Ms. Handler, Ms. Lapitskaya, Mr. Titera, Alexandria Johnson, Isaac Maycock, and Kayla Jahangiri.

I. Introduction

This alert highlights key trends and insights from our analysis of the cybersecurity disclosures made by 97 S&P 100 companies in their 2024 Form 10-K filings, as required by new Item 106 of Regulation S-K (“Item 106”), as of November 30, 2024. [1]

As discussed in a previous client alert, the Securities and Exchange Commission (“SEC” or “Commission”) adopted on July 26, 2023, a final rule requiring public companies to provide current disclosure of material cybersecurity incidents and annual disclosure regarding cybersecurity risk management, strategy, and governance. Under Item 106, which is required to be addressed in new Item 1C of Form 10-K, public companies must include disclosures in their annual reports regarding their (1) cybersecurity risk management and strategy, including with respect to their processes for identifying, assessing, and managing cybersecurity threats and whether risks from cybersecurity threats have materially affected them, and (2) cybersecurity governance, including with respect to oversight by their boards and management. [2] All public companies were required to comply with these disclosure requirements for the first time beginning with their annual reports on Form 10-K or 20-F for the fiscal year ending on or after December 15, 2023.

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The Momentum of DEI Metrics in Incentive Programs

Posted by Subodh Mishra, ISS STOXX, on
Wednesday, January 8, 2025
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Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS-Corporate memorandum by Sandra Herrera Lopez, Vice President, Data Analytics; and Kevin Kim, Associate, Compensation & Governance Advisory at ISS-Corporate. 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.

Environmental, Social and Governance (ESG) concerns have become some of the top issues for corporate America in recent years. However, discussions surrounding these initiatives have become highly politicized and polarized, with anti-ESG shareholder proposals on the rise, certain companies rolling back their DEI initiatives, and falling shareholder vote support for various environmental and social proposals in recent years. At the same time, some shareholders are pushing companies to take more ambitious actions.  [1] The U.S. Supreme Court’s June 2023 ruling to significantly limit the use of race status in college admissions has also emboldened investors challenging Diversity, Equity, and Inclusion (DEI) initiatives at public companies.

Many public companies have been incorporating ESG considerations including DEI into compensation programs to incentivize their executives to achieve sustainability and DEI goals as well as financial objectives. Now, some are re-evaluating their approach given the recent shifts in the political and legal landscape. Against this backdrop, ISS-Corporate examined the incentive pay data for S&P 1500 companies to determine the prevalence, usage and payout levels of DEI metrics as well as changes these metrics measure.

KEY TAKEAWAYS

  • ESG metrics experienced a period of rapid adoption among S&P 1500 companies, with more than 50% now incorporating at least one in their incentive program compared with 29% in 2021. 41% S&P 500 companies utilize a diversity related metric in their incentive programs. That’s significantly above the mid-cap S&P 400 at 18% and the small-cap S&P 400 at 12% in 2024.
  • Diversity, equity and inclusion metrics to assess performance have lost momentum after a boost from 2021 to 2023.
  • Gender diversity metrics are more prevalent than ethnic considerations. 18% of diversity metrics in 2023 mentioned gender, while only 10% refer to ethnicity.
  • Diversity metrics are 7% more likely to be achieved and yield payout than financial metrics.
  • Disclosures pertaining to DEI metrics have become more transparent. Approximately 61% of S&P 1500 companies now provide complete disclosure of their DEI metrics. This represents a sharp increase from 34% in 2019.

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Private Profits and Public Business

Posted by Aneil Kovvali (Indiana University) and Joshua Macey (Yale Law School), on
Wednesday, January 8, 2025
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Aneil Kovvali is an Associate Professor of Law at the Indiana University Maurer School of Law, and Joshua Macey is an Associate Professor of Law at Yale Law School. This post is based on their recent article forthcoming in the Texas Law Review.

The view that corporations should be run for the financial benefit of shareholders is based on two related assumptions. The first is that shareholders hold the residual claim on the firm’s assets. Residual claimants are entitled to whatever value is left after the firm has met its legal and contractual obligations to creditors, suppliers, and employees. If a firm develops a useful product, shareholder profits increase. If an investment does not work out, shareholders are the first to incur a loss. Shareholders therefore have a financial interest in pursuing projects that will efficiently meet people’s demand for goods and services.

The second assumption is that market and regulatory mechanisms are capable of causing the firm’s revenues and costs to reflect the interests of non-shareholder constituents. Stakeholders who do not own shares have numerous ways to express their preferences. Consumers select products that appeal to them. Employees pick jobs based on pay, flexibility, or location. The government can tax or ban harmful activities. These market, contractual, and regulatory interventions create financial incentives for shareholders and managers to account for non-shareholder interests such as protecting the environment and worker welfare.

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Financial Services Merger of Equals and Strategic Mergers: Striking a Difficult Balance

Posted by Edward Herlihy and Brandon Price, Wachtell, Lipton, Rosen & Katz, on
Wednesday, January 8, 2025
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Edward Herlihy is Co-chairman of the Executive Committee and a Partner, and Brandon Price is a Partner at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

As 2025 begins, optimism abounds for a return to a normal regulatory environment that, together with improved economic and business conditions, leads to robust bank and other financial services M&A activity. Merger of equals or “MOE” transactions have been common in financial services historically and were prevalent during the first Trump Administration, as exemplified by the $28.3 billion merger of BB&T and SunTrust creating Truist and the $21.5 billion merger of Global Payments and TSYS.

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ESG Performance Metrics in Executive Compensation Strategies

Posted by Matteo Tonello, The Conference Board, Inc., on
Tuesday, January 7, 2025
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Matteo Tonello is Head of Benchmarking and Analytics at The Conference Board, Inc. This post is based on a Conference Board memorandum by Mr. Tonello, Paul Hodgson, and Andrew Jones. 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.

More than three-quarters of companies in the S&P 500 incorporate environmental, social & governance (ESG) performance measures into their executive incentive plans, according to 2024 disclosures, up from two-thirds in 2021. This report analyzes the focus areas and methods of integration of ESG metrics into performance measurement across both the S&P 500 and the Russell 3000.

Key Insights

  • Companies continue to link executive compensation to ESG performance despite the recent pushback against ESG, with 77.2% of S&P companies incorporating ESG performance into executive compensation design in 2024, down marginally from 77.8% in 2023.
  • ESG measures, particularly strategic scorecards, have seen significant growth, doubling in use across both the S&P 500 and Russell 3000 alongside increased adoption of standalone and individual metrics.
  • Human capital management remains the most widely used ESG metric category, while environmental metrics saw rapid growth from 2021 to 2023 before leveling off in 2024 amid growing ESG pushback.
  • The use of diversity, equity & inclusion (DEI) metrics declined between 2023 and 2024, although a closer analysis suggests a shift in how DEI is being assessed: moving from individual performance assessments to stand-alone and strategic scorecard measures.
  • While growth in the use of ESG metrics in long-term incentives has slowed, growth in their use in a combination of both short- and long-term incentives is increasing.

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CEO Turnover and Director Reputation

Posted by Felix von Meyerinck (University of Zurich), Jonas Romer (University of St. Gallen), and Markus Schmid (University of St. Gallen), on
Tuesday, January 7, 2025
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Felix von Meyerinck is a Senior Research Associate at the University of Zurich, Jonas Romer is a Research Assistant at the University of St. Gallen, and Markus Schmid is a Professor of Corporate Finance at the University of St. Gallen. This post is based on their recent article forthcoming in the Journal of Financial Economics.

Introduction

The recent forced departure of Intel’s CEO Pat Gelsinger vividly illustrates the complex dynamics of CEO dismissals. After a pivotal board meeting assessing the company’s progress in regaining market share, Gelsinger was presented with an ultimatum: retire or be removed. The board’s frustration with “slow progress” and concerns about “the lack of products capable of winning in the market” led to a reactive dismissal without an immediate permanent successor – appointing two interim co-CEOs instead. This high-profile case raises important questions about how such decisions affect the reputation of the directors involved. However, empirical evidence on reputational consequences of forced CEO turnovers on involved directors is scarce, with much of the academic literature building on the presumption that forcing out an underperforming CEO signals effective board monitoring. Our paper titled “CEO Turnover and Director Reputation”, forthcoming in the Journal of Financial Economics, challenges this view. By analyzing a comprehensive sample of forced CEO turnovers at S&P1500 firms between 2003 and 2017, we provide novel and systematic empirical evidence that decisions such as Gelsinger’s removal from the company’s helm negatively affect the reputation of directors involved and thus indicate governance failure at the board level.

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The 2025 Annual Meeting and Reporting Season: Annual Meeting and Corporate Governance Trends

Posted by Brian V. Breheny, Raquel Fox, and Page Griffin, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, January 7, 2025
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Brian V. Breheny, Raquel Fox, and Page Griffin are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Breheny, Ms. Fox, Mr. Griffin, Marc S. Gerber, Joseph M. Yaffe and Khadija L. Messina.

Revisit Disclosure Controls and Procedures for Related-Party Transactions

SEC rules require public companies to maintain and regularly evaluate the effectiveness of DCPs. CEOs and CFOs also must certify the effectiveness of the company’s DCPs on a quarterly basis. In addition, several SEC enforcement actions have alleged that companies failed to maintain adequate DCPs. These actions highlight the importance of periodically reassessing DCPs and considering any necessary changes to support the consistency, accuracy and reliability of required and voluntary disclosures.

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SEC Clawback Rules: Initial Impacts in the 2024 Proxy Season

Posted by Subodh Mishra, ISS STOXX, on
Monday, January 6, 2025
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Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS-Corporate memorandum by Elis Benedetti, Research Associate with ISS Governance.

Introduction

Malus and clawback provisions allow companies to recover and/or withhold sums or share awards in specific circumstances [1], such as in situations where values were paid inappropriately or based on inaccurate or misleading information. These policies aim to mitigate excessive risk-taking that certain remuneration plans may incentivize.

All New York Stock Exchange (NYSE) and Nasdaq Stock Market (Nasdaq) listed companies had until December 1, 2023, to adjust their remuneration polices to comply with new clawback rules mandated by the Securities and Exchange Commission (SEC), the SEC Clawback Rules [2].

This report examines how US companies responded to this requirement, as interpretated by the ISS US-Benchmark Research team. The review analyzes the number of companies that had changes in their clawback policies in 2024 compared to what they had in place in 2023.

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Does Common Ownership Raise Antitrust Concerns?

Posted by Ronald Masulis (University of New South Wales), on
Monday, January 6, 2025
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Ronald Masulis is the Scientia Professor of Finance at the University of New South Wales. This post is based on a recent paper by Professor Masulis, Professor Huaizhou Li, Professor Leo Liu, and Professor Jason Zein.

“The agencies evaluate new learning from the academic community and are prepared to take action on common ownership when appropriate. Where sufficient evidence exists that the effect of particular acquisitions may substantially lessen competition, the agencies will consider appropriate responses, including possible enforcement actions.”

— Federal Trade Commission on Common Ownership

Introduction

In recent decades, the finance sector has witnessed a significant surge in assets managed by large institutional investors. Pension funds, mutual funds, and family trusts now commonly hold substantial equity stakes in multiple publicly traded companies, including those that compete directly with one another. This phenomenon, known as common ownership, has sparked a heated debate among economists, legal scholars, and policymakers. The central concern is whether common ownership dampens competitive incentives among rival firms, potentially leading to anti-competitive behaviors that harm consumers.

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Matters To Consider for the 2025 Annual Meeting and Reporting Season: Disclosure Developments

Posted by Brian V. Breheny, Raquel Fox, and Page Griffin, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, January 6, 2025
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Brian V. Breheny, Raquel Fox, and Page Griffin are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Breheny, Ms. Fox, Mr. Griffin, Marc S. Gerber, Joseph M. Yaffe, and Khadija L. Messina.

Assess Trends in Cybersecurity Disclosures

The Securities and Exchange Commission (SEC) adopted fnal rules in 2023 intended to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance and incident reporting by public companies, including foreign private issuers (FPIs). specifically, the SEC’s amendments require: (i) current reporting of material cybersecurity incidents on a new Item 1.05 of Form 8-K; and (ii) annual reporting on Forms 10-K and 20-F of company processes for identifying, assessing and managing material risks from cybersecurity threats; management’s role in assessing and managing the company’s material cybersecurity risks; and the board’s oversight of cybersecurity risks.

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