Excluding Shareholder Proposals: When Ratification Creates a Direct Conflict

The annual scrum between companies and shareholders seeking to have their proposals included in the company’s annual proxy statement is well underway.  One of the bases upon which a company may exclude a shareholder proposal from its proxy statement is if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”  After some controversy in 2015 over the scope of what it means to “directly conflict,” the SEC staff issued Staff Legal Bulletin (SLB) 14H, which said that proposals conflict only “if a reasonable shareholder could not logically vote in favor … Read more

The Governance Implications of Business Disruption

In 2018, corporate boards will increasingly be called upon to respond to how innovative competitors disrupt their companies’ business models.  These competitors use technology, scale, and sharp insights into consumers to lower prices, improve products and services, and draw customers away from traditional companies, forcing those companies to cut costs and lose relevance.[1] Blockbuster, Borders, and ESPN are prime examples of victims of nimble disruptors.

Victims typically overlook the trajectory of disruptors, which focus initially on perfecting their business models rather than their products or services.[2]  Flawed governance can lead to such oversight by making it hard for … Read more

Corporate Governance, Tax Avoidance, and Finance Constraints

In response to greater financial constraints and more costly external financing, firms may avoid corporate taxes to generate funds for investment. In that sense, outside investors may recognize tax management as a value-increasing activity, especially for a financially constrained firm. However, more aggressive tax avoidance may also be associated with increased opportunities for rent diversion by firm managers. Therefore, the impact of corporate tax avoidance on financial constraints is likely to depend on the strength of a firm’s corporate governance. In an article forthcoming in Financial Management [1],  we examine how corporate governance affects the relationship between a firm’s tax … Read more

Fried Frank Discusses Delaware Ruling that Corporate Recapitalization Required “Entire Fairness” Review

In NRG Yield v. Crane (Dec. 12, 2017), the Court of Chancery dismissed fiduciary duty claims against directors who approved a corporate recapitalization that was proposed by a controller and would perpetuate its control. The reclassification provided for the issuance of non-voting equity that could be used by the corporation as currency to make future acquisitions without diluting the controller’s voting control.

Chancellor Bouchard concluded that the recapitalization was a “conflicted controller transaction” to which “entire fairness” presumptively applied because the controller obtained a “unique benefit” from the transaction not shared with the other stockholders—namely, the ability to maintain its … Read more

CamberView Discusses ISS Changes to Compensation-Related Methodologies

On December 14,  ISS released its Frequently Asked Questions (FAQ) documents on U.S. Compensation Policies and U.S. Equity Compensation Plans as well as a whitepaper on Pay-for-Performance Mechanics designed to help stakeholders understand upcoming changes to its compensation-related methodologies. These documents are ISS’s final, and more fulsome, description of the methodological changes previewed in its preliminary FAQs document which was released in November. All changes will be effective for annual meetings on or after February 1, 2018.

ISS announced two key changes to its methodology for 2018. First, ISS modified its quantitative pay-for-performance screen, most notably by adding a new … Read more

How Should the Law Classify Decentralized Businesses?

In July 2017, the Securities and Exchange Commission (SEC) issued a ruling on The DAO, a decentralized smart-contract based investment fund, determining that the tokens it sold were unregistered securities and warning that other initial coin offerings (ICO) may need to comply with securities laws.[1] The DAO operated a decentralized venture capital firm on top of the Ethereum protocol. Investors contributed ether (a crypto-currency) to The DAO and received DAO tokens in exchange. The DAO held the ether in smart contracts, while the DAO tokens entitled investors to: (1) vote on which investment proposals to fund, and (2) a … Read more

Delaware Supreme Court Limits Ratification Defense for Director Compensation Awards

On December 13, the Delaware Supreme Court[1] reversed the Court of Chancery’s decision in In re Investors Bancorp, Inc. Stockholder Litigation,[2] and held that entire fairness will apply to any board’s decision to award director compensation unless the award is either (1) specifically approved after the fact “by fully informed, uncoerced, and disinterested stockholders,” or (2) effectively pre-approved, in the form of a “self-executing” plan that leaves no room for discretion with respect to specific awards.  This marks a change in Delaware law, and eliminates the discretion that boards previously could exercise safely under stockholder-approved compensation plans … Read more

How Preliminary Examiners Could Improve Corporate Governance for Companies in Bankruptcy

In my article Chapter 11, Corporate Governance and the Role of Examiners, I propose a possible solution to corporate governance problems caused by the debtor-in-possession model of Chapter 11 bankruptcy proceedings.

Agency and Law Enforcement Problems in Chapter 11

Corporate governance does not have many advocates in bankruptcy proceedings. In a Chapter 11 action, managers run the company and have to take many heterogeneous interests into account. However, they do not always have incentives to do so. Depending on the circumstances, management relies either on the shareholders or on the influential creditors. The latter – hedge funds, private equity … Read more

Does Shareholder Protection Drive Development of Stock Markets?

Does the quality of legal and other institutions make a difference to economic development and growth? In their very well-known studies of the relation between law and finance, Andrei Shleifer and his collaborators (in particular Rafael La Porta and Simeon Djankov) found evidence to support this claim. Their econometric analysis showed that higher levels of shareholder and creditor protection were correlated with increased financial development. This work became highly influential among researchers and policy-makers. Since the mid-1990s, the widespread belief has been that strengthening shareholder and creditor rights will lead to improved financial outcomes.  This view became a mainstay of … Read more

King & Spalding Discusses ISS Voting Policies for 2018

On November 16, 2017, Institutional Shareholder Services (“ISS”) issued its updated proxy voting guidelines for the upcoming 2018 proxy season.  Notable updates applicable to U.S. companies include new or revised policies:

  • to respond to recurring patterns of excessive non-employee director compensation;
  • relating to director elections at companies with poison pills; and
  • to address shareholder proposals on gender pay gaps.

ISS also clarified its policies on a number of other topics.  The full text of the 2018 proxy voting guidelines published by ISS may be accessed here.

Non-Employee Director Compensation

Under the new guidelines, ISS will recommend voting against board … Read more

How Corporate Social Responsibility Affects Audit Fees

The past two decades have witnessed a dramatic increase in firms’ engagement with Corporate Social Responsibility (CSR) in response to the needs and expectations of a wide range of stakeholders. CSR practices can be understood as voluntary steps to improve social or environmental conditions. Examples of CSR practices include offering employees child day care or paid parental leave, reducing the carbon footprint or donating to charity. Together with the increasing attention, an important debate about CSR has emerged between two opposing sides. Proponents of CSR argue that socially responsible practices can have a positive impact by enabling firms to secure … Read more

Are CEOs a Dime a Dozen or Worth Their Weight in Gold?

In recent years, there has been considerable criticism of the amount of money that CEOs earn to run the largest U.S. companies. Governance researchers have expended considerable resources examining executive compensation in an effort to determine whether pay levels are set fairly. The results of these studies are generally mixed.

An important and related question, however, is rarely asked: Just how scarce is CEO talent? How many people are very well qualified to run a large, publicly traded company? These questions have important implications for CEO pay levels, performance measurement, succession planning, and internal talent development.

CEO Talent Pool

Recently, … Read more

Gibson Dunn Discusses Proxy Policy Updates and Action Items for 2018 Annual Meeting

The two most influential proxy advisory firms—Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”)—recently released their updated proxy voting guidelines for 2018.  The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments.  An executive summary of the ISS 2018 policy updates is available here and a more detailed chart showing additional updates to its voting policies and providing explanations for the updates is available here.  The 2018 Glass Lewis Guidelines … Read more

Wachtell Lipton Offers Thoughts for Boards of Directors in 2018

As 2017 draws to a conclusion and we reflect on the evolution of corporate governance since the turn of the millennium, a recurring question percolating in boardrooms and among shareholders and other stakeholders, academics and politicians is:  what’s next on the horizon for corporate governance?  In many respects, we seem to have reached a point of relative stasis.  The governance and takeover defense profiles of U.S. public companies have been transformed by the widespread adoption of virtually all of the “best practices” advocated to enhance the rights of shareholders and weaken takeover defenses.

While the future issues of corporate … Read more

How Taxes on Managers Affect Corporate Risk-Taking

Fiscal policy—and taxation in particular—is one of the most important tools that policymakers can use to influence the economy. While the effect of corporate taxes on managers’ corporate investment decisions has been extensively studied, little is known about the effect of managers’ personal taxes on their corporate investment decisions. In a recent study, we attempt to fill this gap by examining the relation between personal income taxes levied directly on senior managers, hereafter “managerial taxes,” and their corporate risk-taking. Given their unique position as primary decision-makers at the firm, understanding whether and how taxes on senior managers affect corporate decisions … Read more

It’s Time to Redefine Corporate Social Responsibility

After years of growing concern over the reach and power of multinational corporations (MNCs), there has been increasing interest in a variety of means to improve their transparency and accountability. In particular, many people have focused on the responsibility of MNCs for their environmental and social impacts, including impacts on vulnerable stakeholder groups. The notion that corporations have an obligation to engage in socially responsible business practices and consider their impacts on stakeholders is generally known as corporate social responsibility (CSR). Alongside concerns over globalization, environmental degradation, and exploitation of cheap labor in developing nations, the past decade has seen … Read more

Lessons from the Evolution of Corporations and Shareholder Rights in China

Although China seems to have taken far longer than Western developed nations such as the UK, the U.S., and Germany to create a modern corporate system, the imperial Qing government promulgated as early as 1904 a corporate law that included rules on limited liability and equal treatment of shares. Why then did it take another century for a mature corporate law and governance system to emerge?

Throughout 150 years of corporate evolution in China, the government has to varying degrees played an active and dominant role. It exercised complete control at the start of the late Qing Dynasty (1860-1911) but … Read more

Wachtell Lipton Discusses Deal Activism and the EQT Proxy Contest

“Deal Activism,” in which activists invest to oppose announced deals, has become an increasingly frequent component of the activist playbook.  While efforts by the target company’s shareholders to oppose a deal to secure a higher bid have received the most media attention, activists have also run campaigns against acquirors to block transactions outright, to extract concessions or to generate pressure against a board.  This occurs most frequently in strategic, stock-for-stock transactions where votes are needed on both sides.

The recent proxy contest over EQT Corporation’s strategic merger with Rice Energy demonstrates that these fights can be fought and won.   EQT … Read more

How Banks Affect Borrowers’ Corporate Governance and Incentive Structures

It is well known that banks play an important role in monitoring borrowing firms (e.g., Diamond, 1984). Yet, how banks choose among alternative mechanisms that reduce agency costs with borrowers is not completely understood. In our paper, “Bank Relations and Borrower Corporate Governance and Incentive Structures,” we document that, as banks and borrowers develop closer relationships, borrowing firms adopt corporate governance and incentive structures that help to reduce the banks’ risk of expropriation by the managers and shareholders.

While some bank monitoring can constrain managerial opportunism and thereby benefit debtholders and shareholders, banks also protect themselves against actions that benefit … Read more

How Executive Compensation Affects Firms’ Choice of Financing

The separation of corporate ownership from control leads to an agency problem caused by the divergent interests of shareholders (the principals) and management (the agent).  One area of contention is the level of risk-taking by the firm.  Managers’ investment in human capital makes them more risk-averse than shareholders are, and this difference creates losses that account in part for the agency cost of equity.  To mitigate this cost, prior research suggests that managers be paid in stock and stock options, in addition to cash compensation, so that their interests are aligned with those of shareholders.

Unfortunately, the convergence of managers’ … Read more