Corporate governance - Vigil

For a long time economists—whose median income, according to a survey of the American Economic Association (aea), is $104,000 a year—considered minimum wages to be harmful. A survey of aea members in 1992 found that 79% of respondents agreed that a minimum wage increases unemployment among young and low-skilled workers. In an often fractious field, that is about as close to a consensus view as can be found. Although many economists recognised that low pay can indeed be a real problem, they argued that no pay was worse. They were not the only people who thought so. The same argument was used by Republican politicians. In 1968, America’s federal minimum wage stood at its highest level since first being applied in 1938. During the following two decades it fell, in real terms, by 44%. Though Jimmy Carter raised the wage in each of the four years he was president, keeping pace with inflation, Richard Nixon raised it only twice in six years and Ronald Reagan not once in eight. Some state and local politicians, mostly Democrats, tried to offset the fall by raising their minimum wages, creating a patchwork of different levels. The disparities this created allowed detailed empirical research on the policies’ effects, and provided the means by which the economists’ consensus would be undermined. Not only did this see the conventional wisdom on minimum wages challenged in America; it also saw such policies spread elsewhere. Britain introduced a national minimum wage in 1998, and has increased it in recent years. Germany’s came into effect in 2015. Around 90% of countries have some sort of legal wage floor, although enforcement practices vary widely. 

(1) What this report finds: Corporate boards running America’s largest public firms are giving top executives outsize compensation packages that have grown much faster than the stock market and the pay of typical workers, college graduates, and even the top 0.1%. In 2019, a CEO at one of the top 350 firms in the U.S. was paid $21.3 million on average (using a “realized” measure of CEO pay that counts stock awards when vested and stock options when cashed in rather than when granted). [...]

(2) Why it matters: Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay—and because so much of their pay (about three-fourths) is stock-related, not because they are increasing productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or were taxed more).

(3) How we can solve the problem: We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include reinstating higher marginal income tax rates at the very top; setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation; establishing a luxury tax on compensation such that for every dollar in compensation over a set cap, a firm must pay a dollar in taxes; reforming corporate governance to give other stakeholders better tools to exercise countervailing power against CEOs’ pay demands; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

Special Purpose Acquisition Companies (“SPACs”) continue to be increasingly popular vehicles for entities or individuals to raise capital to pursue merger opportunities, and for private companies seeking to raise capital, obtain liquidity for existing shareholders and become publicly traded. This post provides an update to SPAC structures and transactions since a 2018 post (Special Purpose Acquisition Companies: An Introduction) and provides an expanded discussion of considerations for De-SPAC transactions and a description of recent SEC positions. Since the beginning of 2016, each year has set a record in terms of total number of SPAC IPOs and the amount of capital raised in those IPOs. Through June 30, 2020, the year was on pace to exceed the prior year once again and, through the date of this article, the amount of capital raised in SPAC IPOs in 2020 has already eclipsed all of 2019. Since the beginning of 2020 through July 22, 2020, 48 SPAC IPOs have been completed, raising almost $18 billion in proceeds, with another $5.4 billion of SPACs on file to complete IPOs this year. SPACs have remained popular notwithstanding the COVID-related market disruption, perhaps because of the flexibility of SPACs to pivot to attractive industries based on changing market fundamentals, and in part because SPAC IPO investors have the downside protection of redemption decisions. Since the 2018 post, SPAC IPOs continue to be typically structured as the issuance of a unit comprised of a share of stock and a warrant component. In some respects, the warrants have become more issuer friendly. For example, there are now examples of one-quarter warrants and one-fifth warrants—and one deal with no warrants at all—and several SPACs have included an option for the SPAC to redeem the warrants for stock. However, most SPACs now include an anti-dilution adjustment applicable to the warrants, commonly referred to as the “crescent term,” as described in the following paragraph.

A Dutch law that would hit multinationals leaving the Netherlands with billions in exit taxes is gaining political support after Unilever warned it would have to reverse its decision to relocate from Rotterdam to the UK if the initiative passed.  Derided as a “Hotel California” tax law by critics after the titular lodging in the Eagles’ song from which “you can check out any time you like, but you can never leave”, the proposal is awaiting a key legal opinion this month that will determine its compatibility with Dutch and EU tax law. Political parties in the government and opposition have indicated they will back the law if it is deemed legal.  Unilever warned last week that “if the bill were enacted in its present form” and applied to the company’s planned restructure, it would not proceed with its plan to establish a single legal entity in the UK. The maker of Dove soap and Magnum ice-creams has estimated it would face a €11bn retroactive penalty if the bill was approved.  Put forward by Green MP Bart Snels, the bill is designed to penalise companies with revenues of more than €750m who depart from the Netherlands for low-tax jurisdictions. In the case of Unilever, Mr Snels said the exit fees would apply because the UK does not have a withholding tax on dividends.  “The law is designed to stop a race to the bottom when it comes to corporate taxation,” Mr Snels told the Financial Times. “We do not want companies to ‘shop’ for the lowest-tax jurisdiction.”  [...] Tax has long played a role in Unilever’s tortured attempts to simplify its corporate structure. In 2017 the Dutch government announced plans to scrap its 15 per cent withholding tax on dividends. Months later Unilever announced it would consolidate its Anglo-Dutch structure into a single Rotterdam-based legal entity.

During the Democratic primary, Joe Biden’s opponents attacked him for being heavy on charm but light on policy. Now that he is the party’s candidate, he has put together a detailed platform that contains some of the most radical proposals by a Democratic nominee in recent history. With the former vice-president leading Donald Trump by some distance in the polls, individuals and businesses are looking more closely at what a Biden presidency might mean for them. Here is where Mr Biden stands on some of the big issues.
(1) Taxes
One area where Mr Biden shows his intentions most clearly is on tax. He has promised to undo Mr Trump’s tax cuts, which gave relief to richer households and businesses by moving the top rate of income tax back up from 37 per cent to 39.6 per cent. He would also raise corporate tax from 21 per cent to 28 per cent — though not all the way to 35 per cent, where it was before Mr Trump’s cuts. And he has proposed setting long-term capital gains tax for those earning more than $1m at the same level as income tax. That would mean a jump for top earners from 20 per cent to 39.6 per cent. Mr Biden has talked about using the extra income from these taxes on infrastructure, and green infrastructure in particular. Such a move is likely to require the consent of Congress, meaning he needs Democrats to take back the Senate to achieve his vision.  He will also need Congress’s support to enact his more immediate coronavirus relief package, which would raise unemployment payments and send more money to strapped local governments.

The chiefs of 31 US and European asset management businesses took home combined pay and bonuses that rose 12 per cent to $233m last year, a bumper increase that masks widely divergent rewards for the industry’s top leaders. Large pay growth for chief executives across the corporate landscape over the past decade - at a time when earnings for ordinary workers have stagnated - has led to public anger and growing calls for restraint. Pay rises for asset management chief executives have attracted particular attention because of the weak performance of many actively managed funds and disappointing returns from supposedly sophisticated multi-asset strategies. Asset managers also face accusations that lavish awards to their chiefs blunt their ability to challenge exorbitant executive pay deals in the companies in which they invest. This has raised questions about the effectiveness of asset managers as corporate stewards and led to heightened scrutiny of their voting records on pay. FTfm has expanded its analysis of the annual reports and regulatory filings of listed asset managers, banks and insurers to shine a light on the salaries of investment chief executives. Fourteen of the incumbent CEOs that had been in their post for more than a year received an increase in their total pay while 11 chief executives saw total remuneration fall, often as a result of changes in performance-based stock awards. [...]  BlackRock awarded a 5 per cent pay rise last year to Larry Fink, taking total remuneration for the head of the world’s largest asset manager to $25.3m, ahead of all industry rivals. This modest increase came after a year when BlackRock attracted investor inflows of $429bn, a record for new annual business across the fund industry. Under the SEC’s disclosure guidelines, which exclude some performance-based stock awards made in January 2020, Mr Fink’s pay fell to $24.3m, down 8.3 per cent on 2018, but he retains his position as the asset management industry’s best paid CEO.

Calpers’s investment chief resigned from the biggest U.S. pension fund Aug. 5 amid questions about potential conflicts of interest raised by his personal investments. Now board members are calling for an inquiry into the fund’s handling of the matter. Several members of the 13-person board are asking when California Public Employees’ Retirement System Chief Executive Marcie Frost learned that the pension fund, under former investment chief Ben Meng, steered money into a firm in which he was personally invested. They also want to know what procedures the $412 billion fund has in place to keep investment officials from running afoul of conflict-of-interest rules. Calpers’s board plans to meet Monday for what is expected to be a tense discussion among the elected officials and government appointees who make up the board. Mr. Meng’s abrupt exit sent shock waves through the pension fund, which has grappled with chronic turnover and has on hand only about 70% of assets needed to meet future pension promises. Mr. Meng, unlike predecessors, had investment experience on Wall Street. In his first full year, Calpers reversed a streak of underperformance relative to other large pension plans, earning 4.7% for the 12 months ended June 30 despite losses in the first quarter during the early days of the pandemic. Months before his departure, he had embarked on a push to address Calpers’s shortfall and hit the pension’s ambitious investment target by borrowing against the fund.

The share of veterans in Congress has fallen faster than in the whole population. For twenty years, Elaine Luria sailed the seas with America’s navy, rising to the rank of commander. In January 2019, two years after retiring, she entered the House of Representatives as a member for Virginia’s 2nd district, one of 96 veterans in the 116th Congress. Veterans like Ms Luria remain over-represented in politics—they make up 7% of the adult population but nearly three times that share of Congress—but their numbers have dwindled over the years. That reflects electoral attitudes to military service that are more ambivalent than America’s valorisation of veterans might suggest. It may also have consequences for the way in which America wages and scrutinises its wars. For much of American history, soldiers have dominated the country’s legislative branch. The first Congress, in 1789, was stacked with veterans of the revolutionary war: almost three in five of its members had fought in that campaign or previous ones. In the 20th century, a steady succession of wars in Europe, Korea and Vietnam, fuelled by a national draft, supplied an even larger stream of lawmakers with military experience. Between 1965 and 1975, seven out of every ten members of both houses were veterans, rising to four-fifths of the Senate in the latter year (see chart). [...] Another factor is that the cost of a campaign has spiralled over the years, says Rebecca Burgess of the American Enterprise Institute, a think-tank. Veterans with limited savings may not be able to raise the $2m it costs for a successful House race in 2018, or the $15.7m for a Senate seat. [...] Contrary to stereotype, those who have never worn a uniform are typically more willing to countenance intervention for humanitarian or nation-building purposes, says Danielle Lupton of Colgate University in New York state, though they get skittish when there are casualties. Veterans—whether they have seen combat or not—tend to be more restrained, though favour overwhelming force once a conflict begins.

Supporters of presumptive Democratic nominee Joe Biden are more likely than Trump supporters to say they will vote by mail and are more likely to trust the accuracy of November’s ballot count, a new Wall Street Journal/NBC News poll finds, underscoring partisan differences over how the election should be conducted. Some 47% of voters who back Mr. Biden, the former vice president, plan to vote by mail rather than in person, compared with 11% of Trump supporters. By contrast, 66% of Trump voters say they plan to cast ballots in person on Election Day, the poll found, compared with 26% of Biden supporters. The results suggest that the two parties, in large measure, will have different voting experiences, though voters’ plans could still change. The difference could also affect perceptions of which candidate is leading in the vote tally, since mailed ballots can take longer to count than in-person votes, and some election experts warn the winner might not be clear on Election Night. “If the absentee ballots are favoring a different candidate than the one that was favored in the in-person voting, then, yes, we could see the victor change” in the course of vote-counting, said Stanford University law professor Nathaniel Persily. About 20% of each candidate’s supporters say they would vote before Election Day in person, which has grown more popular in states that have offered it. With coronavirus raising fears among many Americans about in-person voting, several states led by either party have changed election rules to make it easier to cast a ballot by mail. The rules vary by state, and some states, mostly those led by Republicans, haven’t eased their rules. President Trump has previously said he believes mail-in voting benefits Democrats and that states that send a ballot to every voter create opportunities for fraud. Democrats said the president, trailing in polls to Mr. Biden, is trying to cast doubt on the ultimate election outcome.

Justin Danhof has used annual shareholder meetings to question companies on social issues for the last nine years. His conservative think tank, the National Center for Public Policy Research, owns just a few shares in each of about 150 companies and takes advantage of its shareholder status to grill executives on issues ranging from gay rights to boardroom diversity. This year, Danhof often found himself ignored, as companies held their shareholder meetings remotely during the COVID-19 pandemic, and asked investors to submit their questions online. Danhof said his questions on topics such as companies’ dealings with China or restrictions on financing gun makers were answered in only 13 of the 27 virtual shareholder meetings he and his representatives attended. “Companies used the crisis to set up question-and-answer sessions that are a joke,” Danhof said. His success rate was much higher when he could sit near a microphone or in a CEO’s line of sight during in-person gatherings, he added. Danhof is not alone. Investors faced obstacles, such as not being able to ask questions or not having their inquiries addressed, about 55% of the time in a sample of 88 virtual shareholder meetings held this year and reviewed in a Hebrew University of Jerusalem study published this month. The researchers did not provide such figures for in-person shareholder gatherings in previous years but estimated that this year’s virtual meetings had significantly increased the number of dodged questions. To be sure, virtual shareholder meetings have been welcomed by many mom-and-pop investors, who would have otherwise had to travel to a company’s headquarters to attend amid the pandemic. Broadridge Financial Solutions Inc, the top technology vendor to companies for these events, said it helped run 1,494 virtual shareholder meetings this year, up from 326 last year, preserving a key ritual in the corporate calendar.

Company is trying to claw back some compensation paid out to ex-CEO following wrongdoing allegations. McDonald's former CEO is asking a court to dismiss the company's lawsuit against him, calling it "meritless and misleading." Chicago-based McDonald's sued Stephen Easterbrook last week, seeking to reclaim millions of dollars in compensation paid to him. McDonald's fired Easterbrook without cause last November after he admitted to exchanging videos and text messages in a consensual, non-physical relationship with an employee. A search of Easterbrook's cellphone confirmed that account. But McDonald's said it conducted a second investigation last month after it received an anonymous tip that Easterbrook had a physical relationship with another employee. McDonald's said it has since found that Easterbrook had sexual relationships with three employees and destroyed evidence. The company's board says it would not have agreed to Easterbrook's separation agreement — which allowed him to keep more than $42 million in stock-based benefits — if it had that information when he was fired. In a response filed late Friday in Delaware Chancery Court, Easterbrook said McDonald's hired outside attorneys to investigate his conduct, including interviewing employees and reviewing electronic information, before it signed off on his separation agreement. "McDonald's is improperly attempting to get out of its bargain nine months after the fact and despite admitting it always possessed the information upon which is it now relying," Easterbrook's response reads.

The impact of COVID-19 lockdown measures on firms' existing governance arrangements and controls cannot be underestimated. Overall, there is recognition that firms and regulators have fared reasonably well in response to the immediate impact. However, governance arrangements and controls need to be reinforced and enhanced in this new reality – where firms and regulators have been given an insight into how things can be done differently in the future; both need to seize this opportunity. This paper looks at key points such as: The pivotal role that culture has had to play. Traditional control mechanisms and oversight arrangements have been less efficient or unable to function due to large-scale remote working. A firm's culture can help plug the gaps and ensure that all governance and risk control arrangements follow the spirit of the intentions rather than worrying about ill-fitting prescriptive policy or process. How strong corporate governance is often the glue that holds a firm together and tends to be placed under strain in times of crisis. In response to the pandemic, firms have identified benefits of adopting a more technology-based focus to their governance arrangements. Recalibrating risk and rethinking the associated controls as risk management, compliance and internal audit functions are challenged by the ability to perform physical oversight in the office. As hybrid working arrangements form – split between working remotely and getting back into the office – firms need to think carefully about how best to continue to encourage good conduct from their employees and provide appropriate, support, oversight and challenge.

In a week of horrific violence, Mr Lukashenko has done his utmost to prevent that reordering being completed. Almost 7,000 people have been detained, hundreds have been injured, and at least two protesters have died. Security services have used rubber bullets, stun grenades, and water cannons with abandon. Journalists have been targeted. Even people not taking part in protests have been rounded up, beaten, and arrested. “We asked the police why they were doing it, and they said, ‘an order is an order,’” says Alina Buskina, a 20-year-old journalism student who was beaten, arrested, strip-searched, and then left in a room with no food or toilet paper for 24 hours, after running into riot police on her way home from a party. “They’re just like dogs who will do whatever they are told,” Ms Buskina adds. According to Ms Buskina, the women were forced to drink unfiltered tap water and beg guards for food, then told to sign forced confessions that they had participated in “mass disturbances”. When one of Ms Buskina’s cellmates refused, she says a policeman threatened to rape her. “They said, ‘We’ll teach you bitches who to vote for,’” Ms Buskina adds. Women on their periods were told to wipe themselves with their shirts. Eventually, the guards released them, beating them on the way out for good measure. “I’ve read books about war and genocide and I didn’t believe it could really happen. But when you’ve been there, you see the people who do it, you realise that they do exist, they’ve been so brainwashed by our government that they’re ready to do anything to defend it,” Ms Buskina says.

SHANGHAI—Thousands of China-based U.S. and other foreign business executives remain stranded outside the country due to coronavirus-related travel restrictions, leading some to give up hope of returning and posing operational challenges for their companies. The travel disruption due to public-health concerns matters not just for business but also for geopolitics, U.S. business leaders say. With tensions between the U.S. and China at their worst in decades, the American business community—traditionally a buffer in conflict between the two sides—risks being hollowed out by the travel freeze. “Losing big parts of the American business community in China will erode that goodwill,” said Ker Gibbs, president of the American Chamber of Commerce in Shanghai. Mr. Gibbs said the U.S. stands to lose influence and suffer economically if its corporate footprint in China shrinks permanently. By mid-August, more than 1,000 U.S. businesspeople based in the financial hub of Shanghai, not counting family dependents, were stuck overseas, according to Mr. Gibbs. Thousands more Americans living in other parts of China have also been marooned abroad. Altogether around 250,000 foreign professionals normally based in China remain stranded outside the country, according to an estimate by the European Union Chamber of Commerce in China.

Over the last 10 years, average U.S. public company director compensation has increased steadily, in part due to changes in board composition and governance that have increased the number and significance of board leadership positions held by non-executive directors. Over the same period, the average number of hours of work performed by directors has also increased, while the average number of board meetings and size of boards have remained stable. Future director compensation may be influenced by many variables, including the effects of the COVID-19 pandemic and dynamic regulatory change in certain industries. So when setting director pay, companies should remain flexible. While peer company benchmarking can be informative, no single approach to director compensation works for every company.

The economic, social and environmental benefits derived from greater gender equality on boards are numerous—and increasingly important to investors. The traditionally low representation of women in management positions is due to the so-called “glass ceiling”, an invisible cultural barrier that prevents the best educated women from holding positions of responsibility in companies. Equal opportunities, both in social and economic terms, is a fundamental human right. Furthermore, the systematic exclusion of women, who represent half of society, leads to sub-optimal management bodies in companies. A primary objective of the European Union is to achieve equality between men and women in all areas, including decision-making and representation on company boards. In this regard, some governments have enacted mandatory or voluntary laws to promote gender equality, while others have only given recommendations. The table below shows the situation in the main European countries, as well as in the US, Japan and China, for the years 2007 and 2020. It can be seen that the Nordic countries have, in general, the highest percentages and have a more favourable tradition towards equality on boards. Currently, Greece and Portugal have the lowest figures. The UK is in an intermediate position, with 27.2% female presence, meeting its target of 25%. The US shows a situation well below that of most developed European countries. Outside Europe, China and Japan show figures that indicate strong discrimination against women in decision-making.