New NYSE and Nasdaq Clawback Rules Proposed

Margaret Engel is a founding partner and Bonnie Schindler is principal at Compensation Advisory Partners. This post is based on their CAP memorandum. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse M. Fried.

On February 22, 2023, the New York Stock Exchange (NYSE) and Nasdaq Stock Market released rules implementing the Securities and Exchange Commission’s (SEC’s) Dodd-Frank clawback rules. The SEC rules for Section 954 of the Dodd-Frank Act, “Listing Standards for Recovery of Erroneously Awarded Compensation,” were issued in October 2022 and directed the exchanges to adopt clawback policies for listed companies.

Clawback policies require companies to recover executive incentive compensation deemed to have been paid erroneously because of subsequent accounting restatements. While more than 80% to 90% of mid- and large-cap companies have clawback policies in place, the new compensation recovery rules are more stringent than what most companies currently have in place.

The NYSE and Nasdaq rules both closely follow the SEC’s final rule. Noncompliance with the stock exchange rules can result in a company being delisted.

What is the timing for compliance?

Comment Period: The NYSE and Nasdaq rules will be published in the Federal Register and will have a 21-day comment period.

Approval: After the comment period, the SEC must approve the listing standards.


Key updates to 2023 proxy voting guidelines

Carolina San Martin is the Director of ESG Research, and Bram Houtenbos is a Governance Policy and Proxy Voting Manager at Wellington Management. This post is based on their Wellington memorandum.

Following our annual review of Wellington’s Global Proxy Voting Guidelines, we have made a few notable changes. As always, the updated guidance is intended to help Wellington’s investment teams vote proxies in our clients’ best interests. As the name implies, our Guidelines are not intended to be rules that investors must abide by. Each investment team’s votes may align with their investment philosophy according to issues they deem material for their portfolios. The three key updates pertain to overboarding, climate disclosures, and shareholders’ right to call a special meeting.


Excessive director time commitments, or overboarding, can distract board members and cause oversight failures. We carefully consider this issue when voting proxies, balancing the benefits and risks of simultaneous commitments. While outside board service may help directors provide valuable perspectives to the companies they serve, extra workloads and stress can become liabilities, particularly in times of crisis.


A Theory of Fair CEO Pay

Pierre Chaigneau is Associate Professor & Commerce ’77 Fellow of Finance at Queen’s University, Alex Edmans is a Professor of Finance, Academic Director, Centre for Corporate Governance at London Business School, and Daniel Gottlieb is a Professor of Managerial Economics and Strategy at the London School of Economics and Political Science. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here); Executive Compensation as an Agency Problem; Pay Without Performance; The Unfulfilled Promise of Executive Compensation, all by Lucian Bebchuk and Jesse M. Fried; and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

Standard models of executive compensation assume that a manager cares about pay only because it allows him to consume more. He will only improve performance if doing so increases his pay, and the utility from the resulting extra consumption exceeds the cost of the effort required to improve performance. Such models have been highly influential and inspired a stream of empirical research.

However, it is not clear that consumption utility is the only, or even the most important, driver of CEO pay in practice, given that CEOs are typically wealthy and nearly all of their consumption needs are already met. A recent paper by Edmans, Gosling, and Jenter (2022) surveys directors and investors on how they set pay contracts. Both sets of respondents highlight how pay is driven not only by the desire to provide consumption incentives, but also the need to ensure the CEO feels fairly treated. This is consistent with prior research suggesting that pay is a hygiene factor — pay above a certain level provides limited additional motivation, but pay below that level is a strong demotivator.


Chancery Validates SPACs’ Charter Amendments and Share Issuances

Gail Weinstein is Senior Counsel, and Andrew B. Barkan and Brian Hecht are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Barkan, Mr. Hecht, Philip Richter, Steven Epstein, and John M. Bibona 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 SPAC Law and Myths (discussed on the Forum here) by John C. Coates. 

Many SPACs, in connection with a de-SPAC merger, have approved charter amendments authorizing an increase in the number of their authorized shares of Class A Common Stock to facilitate the issuance of shares required for the merger. Based on widely accepted legal advice at the time, such amendments typically were approved by vote of the Class A and Class B Common Stock voting together. However, in a December 2022 decision, Garfield v. Boxer, which came as a surprise to corporations and legal practitioners, the Delaware Court of Chancery indicated that such amendments require, in addition, a separate vote of the Class A common shares.

In response to the uncertainty created by Garfield as to the validity of such charter amendments that were approved only by a joint vote, as well as the validity of the billions of shares that have been issued based on such amendments, the court now has indicated, in In re Lordstown Motors Inc. (Feb. 22, 2023) that, absent unusual circumstances, it will grant requests, made pursuant to DGCL Section 205, for judicial validation of such amendments and share issuances. In bench rulings (Feb. 20, 2023), the court granted Section 205 petitions on this issue that had been submitted by Lordstown and five other companies; hearings on the additional 30 such petitions the court has received are being scheduled for the coming weeks; and the court expects to receive more such petitions.


An Early Look at 2023 CEO & CFO Pay Actions

Ryan Colucci is a Principal at Compensation Advisory Partners. This post is based on his CAP memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk, and Yaniv Grinstein; Paying for Long-Term Performance (discussed on the Forum here) by Lucian Bebchuk, and Jesse Fried; The CEO Pay Slice (discussed on the Forum here) by Lucian Bebchuk, Martijn Cremers, and Urs Peyer; and Golden Parachutes and the Wealth of Shareholders (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang.

This post investigates compensation actions for CEOs and CFOs at S&P 1500
companies that have fiscal year ends between 9/30 and 11/30. The sample consists of
fifty cross-industry companies with median revenue of $4.6 billion and median market
capitalization of $7.0 billion.


Base Salary: Approximately 80% of CEOs and CFOs received salary increases

  • Of those who received an increase, the median increase was 4.4% and 5.5% for CEOs and CFOs, respectively

Annual Bonus: Bonuses declined compared to the prior year for just over half of CEOs and CFOs

  • Bonuses decreased by 10%, on average, for CEOs while CFOs had an average decrease of 12%

Equity Awards: Grant date fair value of equity awards increased by 17%, on average, for both CEOs and CFOs

  • 56% of CEOs and 50% of CFOs received increased equity awards and approximately 20% of both CEOs and CFOs received similar (+/-5%) award amounts compared to the prior year

Total Compensation: Total compensation increased modestly, on average, for both CEOs (+4%) and CFOs (+2%)

  • Significant year-over-year changes (+/-25% or more) in total compensation were seen for approximately 40% of CEOs and 33% of CFOs

Pay Mix: On average, equity awards comprised two-thirds of CEOs total compensation and 56% of total compensation for CFOs

  • Pay mix was generally consistent with the prior year although lower bonus payouts shifted the percentage of variable pay (i.e., incentive compensation) slightly lower for CFOs


The Evolving Battlefronts of Shareholder Activism

Brian Tayan is a researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan, Andrew Baker, David Larcker, and Derek Zaba. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; 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.

We recently published a paper on SSRN (“The Evolving Battlefronts of Shareholder Activism”) that examines current trends in shareholder activism and their potential impact.

Shareholder activism—the practice of shareholders engaging in a campaign to influence corporate actions—has long been a controversial topic in corporate governance. Supporters of activism view activist investors as important players in the capital markets, holding insiders (board members and management) accountable, imposing efficiency, and mitigating agency problems. Critics view activists as opportunists: shareholders with a short-term horizon who take temporary ownership in a target to push through changes or lobby for a quick sale to realize short-term increases in stock price without regard to long-term value creation.

Shareholder activism has been extensively studied by researchers. Activists tend to target companies with a recent history of stock-price underperformance and poor operating performance relative to peers. They typically accumulate a modest initial ownership position (between 6 and 10 percent), sometimes supplemented with derivatives. Activists are often successful in meeting their stated objectives: Klein and Zur (2009) find they do so more than half the time (60 percent) by compelling their target to repurchase stock, initiate a cash dividend, grant them board representation, alter strategy, terminate a pending acquisition, or agree to a proposed merger.


The Credit Suisse Collapse and the Regulation of Banking

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School.

Related research from the Program on Corporate Governance includes Self-Fulfilling Credit Market Freezes by Lucian Bebchuk and Itay Goldstein.   

Credit Suisse, one of the world’s largest 30 banks with assets exceeding $500 billion, melted down earlier this month. How this collapse quickly unfolded raises serious questions about the regulatory actions preceding it and the future of banking regulation.

On the afternoon of Wednesday March 15, the Swiss National Bank (SNB) and the Swiss banking regulator (FINMA) issued a joint statement expressing unambiguous confidence about the stability of Credit Suisse. SNB and FINMA unequivocally stated that Credit Suisse “meets the higher capital and liquidity requirements applicable to systemically important banks.” SNB also pledged to provide CS with liquidity if necessary.

Four days later, however, with CS facing significant withdrawals, SNB chose not to provide additional liquidity but instead forced CS to sell itself on Sunday March 19 to UBS for less than half of the market capitalization CS had just several days ago. And whereas shareholders at least got some value, the Swiss authorities chose to wipe out completely CS bondholders owed about $17 billion.

The actions that Swiss authorities took on Wednesday and on Sunday cannot be both right. If the SNB’s Wednesday March 15 statement about Credit Suisse’s situation was justified, then the assets of CS substantially exceeded its liabilities to enable CS to have the capital of dozens of billions of dollars that was required for a systematically important bank to be well-capitalized. If this were indeed the case, then SNB’s subsequent choices were highly problematic.


The SEC Sets Its Sights on ESG

Isaac Mamaysky is a Partner at Potomac Law Group PLLC. This post is based on his Potomac Law piece. 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.

As more investors seek to align their portfolios with their values, asset managers and financial advisers are increasingly offering environmental, social, and governance (ESG) products and strategies. While investors certainly gravitate towards ESG options, the resulting market demand has created a financial incentive for advisers to brand strategies and investments as ESG even when the categorization may be a stretch.

The SEC has thus been focused on the issue of false ESG claims. For example, at the end of November it announced a $4 million settlement with Goldman Sachs for alleged failures to follow its own ESG policies and procedures when choosing investments for two mutual funds and one separately managed account strategy.

“In response to investor demand,” the SEC explained, “[advisers] are increasingly branding and marketing their funds and strategies as ESG.” [1] But when they do so, “they must establish reasonable policies and procedures governing how the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.” [2]


Emerging trends in ESG governance for 2023

Maureen Bujno is a Managing Director, and Kristen Sullivan is a Partner and leads Sustainability and ESG at Deloitte & Touche LLP. This post is based on their Deloitte 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, 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 Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

There’s no one-size-fits-all solution to overseeing environmental, social, and governance (ESG) matters—and for good reason. Each company must navigate its own uniqueness related to its organizational structure, global reach, environmental impact, business circumstances, and industry requirements. Further, the broad constellation of topics comprising ESG often doesn’t fit neatly into any one board committee’s charge. As a result, companies increasingly are opting for ESG governance frameworks that allocate responsibilities to various combinations of board committees and the full board.

Amid this variability, many are focused on the regulatory landscape. Given the proposed SEC rule on climate risk disclosure, reporting could transition quickly from voluntary to required. In anticipation, companies should get prepared to formally disclose, and ultimately obtain assurance on, their impact on climate as part of their 10-K financial filings.

While the proposed rule focuses on the “E” in ESG, companies should be thinking about the governance framework for their overall ESG strategy, as well as for each defined component, amid increasing political, regulatory, and stakeholder expectations. And given the major impact the proposed rule likely will have on financial reporting, audit committees should understand trends that are rapidly emerging in climate reporting and the broader ESG governance


5 Common Shareholder Proposal Mistakes in an Uncommon Year

Pat Tucker is a Senior Managing Director and Garrett Muzikowski is a Director at FTI Consulting. This post is based on their FTI Consulting piece. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

Shareholder proposal season is upon us, with companies in the full swing of the SEC no action process and beginning to think about their response strategies. This year will be unlike any other. 2023 is poised to be the most unique, and, quite frankly, weirdest year for shareholder proposals we have ever seen:

  • (anti) ESG’s Impact: Companies are no longer just being pressed for more disclosure and action on ESG topics. Now, they are facing questions on whether their ESG efforts are truly in the best interest of shareholder value. Meanwhile, large asset managers and proxy advisors continue to be the targets of loud anti-ESG pressure. Understanding if, and how, stewardship engagement and voting behavior changes will be crucial in 2023.
  • ESG’s First Recession: The potential for an economic downturn will challenge how the investor community prioritizes ESG and governance engagement. While large passive funds are expected to remain committed to their stewardship programs, actively managed funds may refocus recent investment in these teams.
  • Giving Up the Vote: Large institutional investors rolling out voting choice for their clients is in its early days in terms of scale and adoption. Still, the net result is marginally lessening their impact, enhancing the impact of proxy advisors, and raising questions for issuers trying to understand who is actually voting at their annual meeting.
  • Emboldened Proponents: Despite a general decrease in support for proposals last year, shareholder proponents remain emboldened going into 2023. Many of these funds view themselves as the protectors or originators of the ESG movement itself. For the first time ever, they feel their work in promoting ESG is under threat [1]. In our view, this has imbued them with a new energy as they refile proposals that previously saw high support and expand their target universe beyond the typical mega-caps to target companies who may have never faced a proposal before.


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