ISS Discusses the Seven Venial Sins of Executive Compensation

Compensation disclosures have grown significantly over the last decade (mostly for the better), and they continue to evolve with the ongoing engagement between companies and shareholders. Certain compensation practices are known for raising investor concerns, leading to difficult conversations between investors and boards and higher levels of investor opposition of executive pay programs. But beyond outright egregious practices, a careful review of the diverse set of compensation programs available may reveal some compensation practices that do not appear as significantly concerning but can raise pointed questions about a compensation program’s alignment with shareholders’ interests.

We call these potential transgressions the … Read more

Blockchain Solutions for Agency Problems in Corporate Governance

As a foundational technology, blockchain creates the infrastructure for decentralized networked governance that, over time, creates the environment that enables the removal of internal and external monitoring mechanisms previously necessitated by agency problems in corporate governance. Blockchain technology facilitates a substantial increase in efficiency in the agency relationship and lowers agency costs by orders of magnitude.

Agency theory is still today the leading theory for governance conflicts between shareholders, corporate managers, and debt holders. A vast literature attempts to explain the nature of the agency conflicts in corporate governance and possible ways to resolve such conflicts. However, the core agency … Read more

Directors’ Ties to Non-CEO Executives: Information Advantage or Entrenchment?

Understanding factors that facilitate or inhibit boards’ ability to monitor the chief executive officer (CEO) is central to corporate governance. In a recent paper, we analyze how informal relationships between directors and non-CEO executives (hereafter, internal ties) affect board effectiveness.

This overlooked dimension of corporate boards may improve board performance by creating an alternative channel through which valuable information can flow to the board. Social ties between directors and executives may increase the likelihood of information sharing because social connections often lead to more frequent interactions and, more importantly, foster trust between the connected parties. As a result, directors with … Read more

Did Boeing’s Compensation Committee Play a Role in the 737 Max Scandal?

The Boeing 737 Max scandal is one of the most serious corporate crises in U.S. history.  While companies like Enron, Arthur Andersen, and Lehman Brothers were replaceable, Boeing is not.  Consumers and airlines around the world now view the 737 brand as toxic, a point echoed by a recent tweet by President Trump.[1]  Boeing is more than just an industrial company.  It represents American industrial and engineering prowess to the world.  Boeing’s failure is a national failure and represents a loss in American power and influence.  This may be the first time the world followed China’s example on an … Read more

ISS Discusses CEO Ownership, Corporate Governance, and Company Performance

Ownership structure is perhaps among the most significant corporate governance factors, as it determines the balance of power within a corporation and can directly affect governance practices and company behavior. In our review of CEO ownership, we focus on corporate governance characteristics of companies with CEO ownership concentration, and we examine the effect of CEO ownership on company performance.

  • We draw a distinction between CEO ownership concentration in terms of voting power and CEO ownership in terms of a dollar value in the company’s stock. Significant ownership in value does not necessitate significant voting power.
  • CEO voting power concentration is

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Top 10 Corporate and Securities Law Articles for 2018

The Corporate Practice Commentator is pleased to announce the results of its twenty-fifth annual poll to select the ten best corporate and securities articles.  Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2018.  Just short of 400 articles were on this year’s list.  Because of the vagaries of publication, indexing, and mailing, some articles published in 2018 have a 2017 date, and not all articles containing a 2018 date were published and indexed in time to be included in this

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What Public Blockchain Protocol Governance Can Learn from Corporate Governance

Despite the hype, blockchain technology remains in an early phase of development. Indeed, for many public blockchain protocols, the process of building consensus around the desired trajectory of the code base remains under-conceptualized and informal. Such uncertainty has led to some sharp disagreements that have arguably damaged the legitimacy of certain protocols and increased marketplace skepticism. Indeed, there is growing recognition that, although the individuals leading development of public blockchain protocols initially eschewed the notion of formal governance and claimed that decentralization eliminated any need for it, in reality those individuals created governance structures without viewing them as such. As … Read more

ISS Offers an Update on U.S. Director Pay

In recent years, non-executive director compensation has received attention in the U.S. Increased board workloads, shifts in director compensation structure (away from meeting fees and towards slightly larger base retainers, for instance), a few instances of shareholder litigation in relation to excessive director pay, and a few voluntary submissions of management proposals asking for shareholder approval of their non-employee director compensation programs have all contributed to the activity.

Upon review of current trends in director pay, we observe a reasonable increase in total director compensation, across all market segments, and we continue to see differentiation by industry group. Although director … Read more

Vanguard Talks New Proxy Voting Guidelines With PJT Camberview

Vanguard recently made three significant announcements, including an update to its proxy voting guidelines, changes to proxy voting responsibilities for its external managers and a commentary on its views and approach to corporate governance and sustainable investing.

  • On Friday, April 12, the Vanguard Funds released updated Proxy Voting Guidelines [], which are effective as of April 1. While the majority of the updates to the proxy voting guidelines encompass enhanced disclosure on their approach to topics such as executive compensation, governance and environmental and social policies, the Vanguard Funds highlighted three new or refined policies []

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The Unfulfilled Promise of Hedge Fund Activism

Hedge fund activism has generated a large amount of public debate. On one side, the hedge fund activists and their academic cheerleaders argue that hedge fund activism is good for shareholders and society at large. On the other side, potential target companies, their law firms, politicians, and commentators (including academics and judges) blame it for undermining companies and long-term investment. Yet a decade’s worth of research shows that neither side is right.

Up to the mid-2000s, there was little persuasive evidence that shareholder activism generates any economically meaningful improvements in share prices or the operating performance of corporations. Commentators pinned … Read more

ISS Offers Insights into How Much CEOs Are Really Paid

How much compensation does a CEO really end up with? It’s a tough question to answer – the summary compensation table is often cited as what the CEO is paid, but the ultimate value that an executive realized from those grants can differ significantly from the amounts disclosed.

For years, companies have recognized this potential discrepancy; since even before the advent of say-on-pay, companies in perilous performance positions have turned to alternative measures of pay to demonstrate that executives have shared in the pain that investors feel in their portfolio values. These alternatives have included various forms of realizable and … Read more

Do Share Buybacks Deserve More Regulatory Scrutiny?

In 2018, U.S. companies spent $1 trillion to buy back their shares, while they spent $4 trillion to do so between 2008 and 2017. This is raising strong criticism from different quarters in the political sphere. Not only do key Democrats consider it an anathema[1], but Republican Senator Marco Rubio proposed to end the preferential tax treatment of share buybacks.[2] Other Republicans, though, see it as normal.[3]

There is no substantial financial and economic difference between the distribution of a special dividend and a share buyback. However, dividends are taxed immediately, while share buybacks induce an … Read more

How Public Attention to Gender Equality Affects the Demand for Female Directors

Women are starkly underrepresented on corporate boards and more generally in leadership positions. Hillary Clinton’s U.S. presidential campaign and movements like #MeToo have recently attracted lots of attention to gender equality issues. As a result, biases, stereotypes, and female under-representation in leadership positions are widely debated.

In our recent working paper, we ask to what extent public attention to gender equality problems helps to reduce gender biases and stereotypes and to advance female representation in leadership positions. This is an important question because experiments in the psychology literature provide mixed evidence. On the one hand, some suggest that raising awareness … Read more

Diversity’s Role in Boardroom Leadership

What does boardroom culture yield when a board commits to a broad embrace of diversity—including diversity of gender, ideas, ethnicity, race, education, age, and skills?  Do chances improve for decisions that help lead the company to maximize its potential and meet its leadership responsibilities?  And if so, how?

Given all the research data about boardroom diversity, it’s tempting to turn to data for answers.  Yet data are limited in what they can tell us about how diversity affects boardroom culture and leadership.  By contrast, examining the experiences of directors who have served on a board that embraced—or didn’t embrace—diversity as … Read more

Land of the Falling Poison Pill: Understanding Defensive Measures in Japan

The advent of the “shareholder rights plan,” more popularly known as the “poison pill,” fundamentally altered the trajectory of American corporate governance. Intended to defend vulnerable boards from corporate raiders, the poison pill was embraced by U.S. managers in the 1980s as a lifeline in a sea of hostile takeovers. When pundits predicted an imminent wave of hostile takeovers in Japan in the mid-2000s, Japanese boards appeared to embrace the poison pill with equal enthusiasm.

Japan’s experience might have been evidence that corporate governance around the world was destined to converge on the American model – but for two inconvenient … Read more

Opening the Black Box of Companies’ Capital Investment Process

In spite of intensive academic research on capital expenditure efficiency, how firms make investment decisions remains largely a black box. We analyze that process by dividing it into two stages: budgeting of capital expenditures (CapEx) and execution of the budget. We find that these two stages have different effects on investment efficiency, and are in turn affected differently by accounting quality and governance. Further, while opportunistic managers massively exceed investment budgets, managers with high ability strategically find a level of execution errors that optimizes their compensation while remaining undetected by boards. These strategic execution deviations entail significant costs for their … Read more

ISS Discusses Trends in 2019 U.S. Executive Compensation

As we enter the peak of proxy season, we review executive compensation trends in the U.S. based executive pay disclosures so far this year. Our key findings include:

  • Compensation disclosures so far suggest continued increases in CEO pay across all market segments and almost all industries.
  • The proportion of stock-based compensation as a percentage of total pay continues to increase, crossing the threshold of 50 percent of total pay for large companies for the first time this year.
  • Performance-based equity compensation also continues to increase despite concerns of a potential reversal in the aftermath of the repeal of 162(m).
  • CEO

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Corporate Management in the Age of Artificial Intelligence

Law and technology-related research has arrived in the world of corporate law, as academics begin to tackle topics like artificial intelligence (AI), increasing automation and robots, Big Data, and blockchain. In a recent working paper, I focus on a specific aspect that has not received much attention: the future of corporate management in an AI-dominated world.

My paper is divided into two major parts: The first asks whether it is feasible for AI to take over the management of corporations. I argue that it is – and will happen sooner than we might think. The second part is a … Read more

What Boards Should Know About CLOs’ Expanding Role

A series of significant developments provides a timely prompt for boards of directors to acknowledge the expanding role and importance of chief legal officers (“CLO”).

These developments include the departure of several high-profile CLOs; the recognition of the CLO as a key board advisor on workforce culture and ethics; the prison release of Jeffrey Skilling; and most particularly, the 2019 survey of the Association of Corporate Counsel (“ACC”).

Any discussion with the board of these developments should be grounded in the following basic fiduciary considerations.

First is director awareness of the increasing commercial acceptance of “Chief Legal Officer” as the … Read more

Why “Sunset” Provisions for Dual Class Stock Are Not the Answer

On March 28, 2019 the Nasdaq Listing Council invited me to respond to the recent proposal by the Council of Institutional Investors (“CII”) to Nasdaq, requesting it to adopt a rule requiring any company going public with dual class shares to include a mandatory “sunset” provision in the company’s charter.  CII’s proposal would provide that after seven years the company’s stock would automatically convert into a single class unless the stockholders, voting separately as a class, approved extending the dual class listing.  Nasdaq’s Listing Council also invited Barbara Novick of Blackrock to speak on behalf of CII’s Petition.

My response … Read more