Corporate governance - Vigil

Digital technologies are changing the way organizations operate and are redefining the way they interact with employees, customers, suppliers and other stakeholders.

The Ontario Securities Commission has published the final version of its Statement of Priorities for 2017-2018. FAIR Canada is pleased to see the OSC’s continued commitment to investor protection issues in the Notice to the Statement of Priorities, including (i) work to define and  introduce a regulatory best interest standard in Ontario, (ii) addressing advisor titles and proficiency standards,  (iii) achieving an evidence-based resolution to the use of embedded compensation structures and (iv) an effective and fair dispute resolution system as a central component of the investor protection framework – specifically, working with the OBSI Joint Regulators Committee to develop a response to recommendations contained in the independent evaluator’s report, including the recommendation for binding decisions. In addition, FAIR Canada is pleased to see that the OSC has added a new priority on syndicated mortgages after the Ontario government announced in April that regulatory oversight of syndicated mortgages would be transferred to the OSC.

[Last month], General Motors (“GM”) won a decisive victory in a proxy contest waged by Greenlight Capital, the activist fund headed by David Einhorn. Greenlight claimed that GM’s shares, which were trading at a price barely above their 2010 IPO price, were significantly undervalued because the market was not properly assessing the sizeable cash dividends paid on the shares. Greenlight proposed that GM’s shares be split into two classes—a class of “dividend shares” that would have one-tenth of a vote per share and would be entitled to quarterly cash dividends at the current annual rate, and a class of “capital appreciation shares” that would have one vote per share and would be entitled to GM’s earnings in excess of the dividends paid on the dividend shares.

The creation of the mutual fund will go down as one of the greatest innovations in financial history. It has provided tens if not hundreds of millions of unsophisticated and uninformed stock market investors with easy access to low cost portfolio diversification. Moreover, for those investors who do not want to spend time and money searching for portfolio managers who can earn excess risk-adjusted returns, passively managed index funds provide tremendous value.

With the peak of proxy season in the rear-view mirror, companies and investors are analyzing takeaways from the thousands of meetings that have occurred over the past three months. Although most US companies received strong support from shareholders at their annual meeting, others faced low levels of support for executive compensation or directors or high levels of support for a shareholder proposal.

As we approach the end of the 2017 proxy season, the third since the New York City comptroller launched the Boardroom Accountability Project to enact proxy access across the U.S. market, proxy access has begun to transition from its “teenage growth spurt” to its “young adulthood” phase. Its adoption by companies is still on the rise, but not at the same rate; it is still developing its more nuanced features, but with fundamental elements fully formed; and it has short-term predictability, but longer-term questions remain.

For every woman placed on a Fortune 500 board last year, three men were appointed, according to new research from executive search firm Heidrick & Struggles.

A lively debate is erupting over a provision in the House-approved Financial CHOICE Act that would increase the stock ownership threshold for submitting shareholder proposals in the company’s proxy statement from the current level of $2,000 to 1% of common stock outstanding, and would extend the stockholding duration requirement from one year to three years.

Republican legislation would impact both bank regulation and corporate governance 

A broad coalition of state fiduciaries joined New York State Comptroller Thomas P. DiNapoli and New York City Comptroller Scott Stringer [on June 6, 2017] in issuing a Joint Statement on Defending Fundamental Shareowner Rights in strong support of the use of shareholder proposals as an essential tool in maintaining corporate transparency and accountability. The Statement is in response to provisions of the Financial CHOICE Act, legislation pending in the U.S. House of Representatives, which would effectively prohibit most investors from filing shareholder proposals.

Minority equity investments in public companies are on the rise. These are often structured as an investment in convertible preferred stock to give the investor a senior position to other equity while preserving equity upside through the ability to convert to common stock.

How does management decide where to invest capital given the wide array of investment alternatives ranging from mergers and acquisitions (M&A), to dividends and share repurchase programs, to organic growth opportunities? And what is the board’s role in helping to shape those investment decisions?

The last two decades have witnessed an increase in corporate board reforms designed to create greater board independence, audit committee and auditor independence, and separation of the chairman and chief executive officer positions. Do these reforms affect firm value? Existing research on such reforms has typically focused on a single country and yielded mixed results. In our Journal of Financial Economics article, Board Reforms and Firm Value: Worldwide Evidence, we examine the impact of corporate board reforms on firm value in 41 countries and find that such reforms do indeed increase firm value, with the effects determined by the type and nature of the reforms.

The biggest headline of the 2017 proxy season was a change in the policies, engagement efforts and voting of institutional investors and asset managers on environmental and climate change issues, which occurred against the backdrop of shifting U.S. policies on these issues. These changes, which resulted in majority-supported proposals at three S&P 500 companies, reflect intensified investor focus on sustainable business practices—a broad category in which environmental and social risks, costs and opportunities of doing business are analyzed alongside conventional economic considerations—as a key factor in long-term financial performance.

Horizontal shareholding exists when major shareholders own stock in horizontal competitors. A year ago, I argued that such horizontal shareholding can have worrisome anticompetitive effects that help explain various puzzles about our economy (this article was discussed on the Forum here). In a new article, I show that new evidence both confirms my earlier conclusions and indicates the problem of horizontal shareholding is getting worse.

What role(s) do boards of directors play? Existing research generally assumes the model of a corporation described by Berle and Means (1932)—one with a widely dispersed base of shareholders in which control is exercised by management. Yet a growing volume of research shows that most companies around the world have a controlling shareholder or group thereof, for the most part individuals or families. This is true in even in countries where corporate ownership is relatively more widely held, and increasingly so: the number of public corporations in the United States has almost halved over the last 20 years, and a similar phenomenon has taken place in the United Kingdom.

Executive pay practices settled in to a new normal in 2016, characterized by modest pay increases, continued emphasis on performance-oriented compensation, and annual and long-term incentive (LTI) plan design features and metrics consistent with those of recent years.

In a recently released study, we examined the value implications of board declassifications promoted by the Harvard Law School Shareholder Rights Project (“SRP study”). In a May 2017 note, Lucian Bebchuk and Alma Cohen “contest” the results in our study. In our reply, “Board Declassification Activism: Why Run Away from the Evidence?” we show that the Bebchuk-Cohen critique is not only unwarranted, but also fails to engage with our study’s central finding: that the declassification activism of the Shareholder Rights Project (“SRP”) was followed by substantial declines in firm value of from $90 billion to $149 billion.

In October 1972, former Supreme Court Justice Arthur Goldberg resigned from his seat as a director of Trans World Airlines. In a New York Times article published afterward, he expressed his frustration, stating that: “[t]he outside director is simply unable to gather enough independent information to act as a watchdog or sometimes even to ask good questions. When presented with the agenda of the board meeting, the director is not basically equipped to provide any serious input into the decision. Realistically, it has already been made by management.”

Shareholder activism – in the form of both headline-grabbing proxy contests and the new, quieter engagement between boards and shareholders – has been on an upward trend in Canada for the past 10 years. It is now a permanent feature on the corporate landscape, reflecting the increased focus of shareholders, boards of directors, regulators and other market participants on corporate governance and shareholder democracy.

Those who work in the cybersecurity industry believe that there are two types of companies in the United States: “those that have been hacked and those that don’t know they’ve been hacked.” [1] Indeed, more and more companies are experiencing data breaches, and it seems that hardly a week goes by without a data breach reported in the headlines.