Corporate Charitable Foundations, Executive Entrenchment, and Shareholder Distributions

Why do for-profit corporations have charitable foundations? Charitable foundations are burdensome to create, costly to administer, may be constrained by payout requirements and excise taxes, and are not necessary for corporations to make charitable donations. Yet as of 2013, 203 of the S&P 500 publicly traded companies had such foundations. That corporate foundations are so common despite their costs suggests that foundations create substantial benefits for corporations or corporate managers. Our new research demonstrates that corporate foundations are a sign of, and vehicle for, self-dealing by entrenched corporate executives.

We demonstrate that foundations play a role in self-dealing in two … Read more

Skadden Discusses How Companies Can Prepare for U.S. House Investigations

For the past several years, Republican majorities in the House of Representatives and Senate have dictated the agenda of Congress. But Democrats will take control of the House in January 2019, thereby regaining the ability to control committee and subcom­mittee agendas, hold hearings and issue investigative subpoenas.

Companies can expect the new Democratic majority in the House to employ these tools to vigorously pursue vastly different legislative and investigative priorities than Republicans. Indeed, Democrats such as Reps. Elijah Cummings and Adam Schiff have been vocal about perceived Republican efforts to thwart certain oversight committees’ pursuit of various lines of inquiry, … Read more

Cleary Gottlieb Discusses Updates to Proxy Adviser Guidelines

As 2018 draws to a close, both Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis are in the process of updating their 2019 proxy voting guidelines.

In mid-October, ISS launched its 2019 benchmark voting policy consultation period, pursuant to which ISS solicits feedback on certain of its proposed voting policies for the upcoming proxy season.  This year, ISS requested comment on proposed policies for U.S. public companies related to board gender diversity and its pay-for-performance model, as described in greater detail below.  ISS plans to announce its final policy changes in mid-November.

In addition, Glass Lewis recently released its 2019 … Read more

The Transatlantic Debate over Shareholder Rights

Effective and sustainable shareholder engagement is a cornerstone of the corporate governance model of listed companies, which is based on a system of checks and balances among boards, management, and stakeholders. Enhancing the involvement of shareholders in corporate governance is therefore an important factor in improving the financial and non-financial performance of companies, particularly with respect to environmental, social, and governance issues, as set forth in the United Nations’ principles of responsible investment (Recital 14 of the Directive, available here). And this is even more the case in view of the fact that the increased involvement of all stakeholders, … Read more

ISS Comments for the SEC Staff Roundtable on the Proxy Process

Institutional Shareholder Services Inc. (ISS) appreciates the opportunity to comment in advance of the SEC Staff Roundtable on the Proxy Process that is scheduled for November 15, 2018.  We focus these preliminary comments on two primary areas, proxy advisory firms and the proxy process.

Proxy Advisory Firms

As a registered investment adviser, we have a fiduciary obligation to our clients to provide  advice that is in their best interest.  In the free market, our clients hire us because we provide services they value and deem to be cost-effective.  We listen to our clients and make our vote recommendations based on … Read more

Internal Whistleblowing’s Counterintuitive Impact on Lawsuits and Settlements

While external whistleblowing—reporting misconduct to regulators or members of the media— has captured much attention, the impact of reporting misconduct anonymously to management, known as internal whistleblowing, is relatively unknown. Our new study, Evidence on the Use and Efficacy of Internal Whistleblowing Systems, reveals the impact of these systems.

Due to the sensitivity of individual internal whistleblowing reports, we received only limited data on each whistleblowing event. No names or specific text were shared. We did have access to over 900 public company internal feedback systems, including reports about financial reporting issues, harassment or other HR issues, business integrity, … Read more

How Boards Can Get Ready for Climate Change

We are constantly reminded of the urgency to act as we witness the impact of climate-related events on peoples’ lives and their communities around the world.

The signing of the Paris Climate Agreement in 2016 was a watershed moment as the world committed to transition to a low carbon economy limiting the increase of global average temperature to 2°C.

Supported by academic research that shows doing good does not entail a trade-off to do well, a growing number of investors are acknowledging the long-term impact of climate change on their investment performance and therefore are integrating climate change aspects in … Read more

Shareholder Activism Through Say-on-Pay

Shareholder activism around the world has increased substantially over the last few years (see here and here for recent examples). Empowered shareholders seek to discipline management and voice their dissatisfaction with specific corporate decisions. A particular source of tension between investors and management is executive compensation, which in a number of jurisdictions requires at least non-binding approval of shareholders through a voting process widely known as “Say-on-Pay.” This regulatory framework has encouraged shareholder activism further and caught the attention of the public and media, with market commentators talking about a “shareholder spring”.[1]

In our paper, “The Importance of Shareholder … Read more

Sullivan & Cromwell Offers Corporate Governance Updates

On October 18, Institutional Shareholder Services Inc. (“ISS”) announced that the comment period for its 2019 benchmark voting policy is open until 5:00 PM ET on November 1, 2018.  For U.S. companies, ISS is soliciting comments on proposed changes relating to board gender diversity and say-on-pay secondary screens.  However, the proposed policy change relating to board gender diversity is not proposed to be in effect for 2019.  ISS is not soliciting comments for tracking director controversies on other company boards or providing adjusted voting results for dual-class companies, both of which were included in ISS’s annual policy survey earlier this … Read more

The Role of Public Pension Funds in Governance

Public pension funds have great influence over corporate governance because of the size and nature of their portfolios: They manage more than $3 trillion in assets and often invest in a large number of companies. Besides largely unobservable private negotiations, voting at annual or special shareholder meetings is one of the most direct ways for investors to affect corporate decisions. CalPERS, the largest public pension fund in the U.S., states that proxy voting is “the primary way we can influence a company’s operations and corporate governance.” This view is shared by a number of other high profile-public pension … Read more

Long-Term Economic Consequences of Hedge Fund Activist Interventions

Our new academic study examines the long-term effects of interventions by activist hedge funds. Prior studies document positive equal-weighted long-term returns and operating performance improvements following activist interventions, and typically conclude that activism is beneficial to shareholders. We challenge and extend prior literature in two ways. First, we find that equal-weighted long-term returns are driven by the smallest 20 percent of firms with an average market value of $22 million. The largest 80 percent of firms experience insignificant negative long-term returns. On a value-weighted basis, which likely best gauges effects on shareholder wealth and the economy, we find that pre- … Read more

Going Concern Opinions, Institutional Ownership, and CEO Compensation

Auditors issue going concern opinions when they have substantial doubts about a client’s ability to continue as a going concern for one year beyond the financial statement date. Abundant anecdotal evidence shows that  companies that received these opinions went through restructurings, with managers and employees losing their jobs or seeing their pay cut. For example, after Ernst & Young sent Texas utility Dynegy Holdings, Inc. a going concern opinion in 2011, a majority of the company’s directors said they wouldn’t consider being re-elected,  and the CEO and CFO said they might leave the company. After Clearwire Corp. received a going … Read more

Proposed New Disclosures for Mutual Fund Advisers

According to the Securities and Exchange Commission (SEC) release establishing the Proxy Voting Rule, an investment adviser “is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client’s behalf, including proxy voting.”[1] This was the rationale behind the rule,[2] which requires investment advisers, including mutual fund advisers, to create and disclose their proxy voting policies and procedures.  However, the SEC and its staff have yet to clarify what these fiduciary duties mean for the largest mutual fund advisers now that they control an extraordinary amount of … Read more

How Institutional Ownership Affects Insider Trading

Institutional owners have traditionally been thought of as passive investors that have little concern for or influence on corporate policies and decisions. In contrast, recent literature shows that while many institutions are passive in terms of their investment choices and holdings, they are not passive in their role as monitors. For example, Appel et al. (2016) find that index mutual funds influence firms’ governance choices. Others find institutional owners exert influence over firms’ dividend choices (Crane et al. (2016)) and corporate tax strategies (Bird and Karolyi (2017), Khan et al. (2017)). In a new study, we examine how institutional ownership … Read more

Lame Duck CEOs

The process of replacing key individuals is crucial to organizations’ performance. This is as true for presidents of countries as it is for CEOs. When a firm announces the departure of a CEO without announcing a successor, the incumbent CEO becomes a lame duck. Consistent with the name’s pejorative connotations, some market participants argue that firms with lame-duck CEOs suffer from a lack of leadership that may create high levels of uncertainty and stall important decisions. This has prompted the SEC and other regulators around the world to require more disclosure of succession plans.[1] For example, in October 2009, … Read more

Don’t Fear California’s New Board Gender Quota

On September 30, 2018, only hours before the deadline, California Gov. Jerry Brown signed bill SB 826, making his state the first in the U.S. to adopt board gender quotas for public companies.

The law requires listed companies headquartered in California to have at least one woman on the board by 2019, and at least two or three women – depending on whether boards have more than five members – by 2021. Companies that don’t meet the quota face a financial penalty that would vary from $100,000 to $300,000 depending on whether the company is facing a first or second … Read more

Wachtell Lipton Discusses the State of Play in Activism

As we approach the 2019 proxy season, developments since September 2017 prompt a brief updated review of the state of play.

  • The threat of activism remains high, and has become increasingly global.
  • Activist assets under management remain at elevated levels, encouraging continued attacks on many large successful companies in the U.S. and abroad.
  • In the current robust M&A environment, deal-related activism is prevalent, with activists instigating deal activity, challenging announced transactions (g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.
  • “Short”

Read more

Sullivan & Cromwell Discusses California’s Female Gender Quotas for Public Companies

On September 30, 2018, Governor Brown of California signed into law a bill, SB-826, to require female representation on the boards of directors of publicly traded companies who identify as being headquartered in the state.  SB-826 makes California the first state to attempt to enact female gender quotas for boards of directors.  SB-826 will become effective on January 1, 2019 and will require companies subject to the legislation to comply with the first phase of requirements (requiring boards of directors to have at least one female member) no later than December 31, 2019.


SB-826 inserts a new Section 301.3 … Read more

Debevoise on Material Omissions in Private Equity Secondary Transactions

As private equity funds approach the end of their lives, a fund’s general partner is often encouraged by the fund’s limited partners and third-party buyers to consider secondary liquidity solutions. Liquidity solutions can involve fund extensions, asset sales to third-party buyers, tender offers to limited partners, or other creative structures to maximize value in remaining fund assets. When properly executed, these structures can satisfy all stakeholders by allowing some to realize value while others remain invested in the assets. These structures, however, can be rife with conflicts of interest. A vivid example of the possible pitfalls—and the vigilance of the … Read more

Shearman & Sterling on Director Compensation and the Delaware Courts

The Delaware courts have recently rendered a series of decisions, culminating with the Delaware Supreme Court’s December 2017 holding in In re Investors Bancorp, Inc. Stockholder Litigation, No. 169 (Del. 2017) (“Bancorp”), limiting the extent to which the business judgment rule protects directors when determining their own compensation. Although the law is still developing, the Bancorp decision has already led some Top 100 Companies to change their director compensation approval processes.

Impact on Stockholder Ratification

In Bancorp, the Delaware Supreme Court reversed the Delaware Court of Chancery and held that awards granted to directors under a stockholder-approved equity incentive plan … Read more