Corporate governance - Vigil

Activist investors have been behind several of this proxy season’s more hotly contested proxy fights, and FTI Consulting data shows there were 722 activist campaigns in the US and Canada last year (CorporateSecretary.com, 2/24). With that in mind, Olshan Frome Wolosky partner Steve Wolosky recently spoke with Corporate ...

In our article, Is Board Compensation Excessive? (forthcoming in the Journal of Corporate Finance), we examine whether board members are overpaid. We also consider whether excessive compensation of directors affects their ability to monitor. We address these issues by carefully constructing a model to predict director compensation. We then identify the presence and magnitude of over- and undercompensation and examine whether superfluous director compensation affects the directors’ monitoring incentives.

June 20, 2017 — Authentic leadership can be a powerful inner resource as a toolbox for all leaders. By leading “authentically” from within, leaders can promote their values, provide vision, and engender confidence from their superiors, peers, and direct reports. Accessing and expressing an inner roadmap to authenticity can be a complex landscape for leaders of color to navigate. This article explores that landscape and provides a guide for navigating it

On June 8, the House of Representatives passed a revised version of the Financial CHOICE Act (the “Act,” available here) in a 233-186 vote. The Act would repeal or modify significant portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and addresses a wide range of other financial regulations. This bill is the second version of a reform bill that was introduced last year by committee Chairman Jeb Hensarling (R-Texas). In many respects, the Act echoes priorities raised in President Trump’s executive order signed on February 3 (see our client alert here) setting forth “Core Principles” intended to guide the regulation of the U.S. financial system and in his presidential memoranda calling for review of certain features of the Dodd-Frank Act (see our client alert here).

On June 12, 2017, the U.S. Department of the Treasury issued recommendations for streamlining banking regulation and changing key features of the Dodd-Frank Act and other measures taken by regulators following the 2008 financial crisis. The recommendations are included in the first of a series of reports to President Trump pursuant to an Executive Order issued on February 3.

On June 8, 2017, the Financial Choice Act of 2017 was passed by the House of Representatives, following a CBO analysis dated May 10, 2017. But both the CBO analysis and the House bill fail to address model risks for depository institution holding companies (DIHCs) that date back to 1999 and the creation of large financial holding companies (FHCs) under the Gramm-Leach-Bliley Act.

This morning we shared with you the latest version of the Directors’ Toolkit – a practical resource designed to assist directors identify and respond to a range of governance related issues. Please accept our apologies as we understand you may not have been able to access the Toolkit. Updated links that work can be found below. Now in its fourth edition, this comprehensive guide is designed to assist directors to more effectively discharge their duties and improve board performance and decision-making.

Using a large sample of firms from 38 countries over the 2001–2012 period, this study finds evidence that, following the adoption of say on pay (SoP) laws, chief executive officer (CEO) pay growth rates decline and the sensitivity of CEO pay to firm performance improves. These changes are concentrated in firms with high excess pay and shareholder dissent, long CEO tenure, and less independent boards. Further, the portion of top management pay captured by CEOs is lower in the post-SoP period, which is associated with higher firm valuations. Overall, these results suggest that SoP laws are associated with significant changes in CEO pay policies.

In a recent decision in Sciabacucchi v. Liberty Broadband Corporation, Vice Chancellor Glasscock of the Delaware Court of Chancery held that a stockholder vote approving both stock issuances and the grant of a voting proxy to the company’s largest stockholder was “structurally coerced” and therefore insufficient to cleanse board action and invoke business judgment review under Corwin v. KKR Financial Holdings LLC. The court determined that while “inherent coercion” did not exist because the large stockholder did not control the company, the vote was nevertheless structurally coerced as the stockholders were essentially forced to approve those transactions to avoid a detriment, and not due to the transactions themselves being beneficial to the corporation.

Our paper, Skin or Skim? Inside Investment and Hedge Fund Performance, publically available on SSRN, examines the decision of insiders to allocate private capital between funds under their control, and the impact of this “skin in the game” on returns received by outside investors. Delegated asset managers are commonly thought of being compensated only through fees imposed on outside investors. However, access to profitable, but limited, internal investment opportunities can also be a form of compensation for managers. Consider the hedge fund industry, which manages over $3 trillion in assets under management, of which $400 billion can be attributed to investments from insiders and related parties. [1] The discretion of where and how to invest this large allocation of insider capital suggests that returns to insider capital is an important, but previously overlooked, component of hedge fund compensation and potential source of conflict of interest between investors.

In In re Appraisal of SWS Group Inc. (May 30, 2017), the Delaware Court of Chancery, relying on a discounted cash flow analysis, determined that the appraised “fair value” of SWS Group, Inc. (the “Company”) was below the merger price paid by acquiror Hilltop Holdings, Inc. The court’s determination of fair value was 7.8% below the value of the merger consideration at closing (about 19% below the value of the merger consideration at the time the merger agreement was announced and the hedge-fund petitioners decided to acquire their SWS shares).

Empowering shareholders can mitigate managerial agency problems but also empower “special interest” activists. Union and public pension funds, the most prolific institutional activists employing low-cost targeting methods, are often accused of pursuing private benefits.

In this report we analyze data on 1,762 U.S.-incorporated Russell 3000 companies and design two regression models to study the relationship between multi-class common equity structures and longterm company performance from 2007 to 2015. We conclude that a multi-class common equity structure with unequal voting rights neither increases nor decreases a company’s annualized return on invested capital (ROIC).

Executive compensation programs at major U.S. companies are crucial for economic success—both for the companies and the economy at large. The topic is complex and controversial, however, with criticisms aimed at the magnitude of pay packages and purported misalignment of compensation with corporate performance and shareholder returns. This contentious environment has been exacerbated by a confluence of proxy advisor influence, regulatory oversight, union criticism, and media scrutiny. The broader income inequality narrative has drawn attention to the compensation provided to U.S. company leadership, exposing companies, boards, and executives to reputational risk. As a result, compensation committees are increasingly struggling to “balance the tension,” motivating executives to increase shareholder value in this regulatory and economic environment.

In 1970, Milton Friedman famously argued that the only social responsibility of business was to maximize profits. These profits, if only returned to the firm’s owners (the shareholders, on whose behalf the management should rightfully act), could be put to charitable purposes as shareholders saw fit. By essentially delegating the task of collecting and disbursing taxes to corporate managers, in Friedman’s analysis, shareholders allowed themselves to unwittingly become pawns in a larger battle to derail the capitalist system. Levitt (1958) captured this perspective succinctly when he wrote, “the business of business is profits.”

The Trump Administration’s latest substantive recommendations on modifications to the U.S. financial regulatory regime strike a modest and practical tone, rather than “doing a big number” on the current state of regulation. On June 12, 2017, the Treasury Department released the first of several reports in response to President Trump’s Executive Order 13772, which called on the Treasury Department to report on laws, regulations and other government policies that are inconsistent with enumerated core principles for regulating the U.S. financial system. The Treasury Department’s Report covers depository institutions—generally “banking.” Subsequent reports will cover capital markets, asset management and insurance industries and products and non-bank financial institutions (including fintech).

Are we witnessing the beginning of a new trend? The history of shareholder proposals to enhance disclosure regarding climate change has been a dismal one. But suddenly, this proxy season, we have climate change proposals succeeding at two—and, as of [May 31, 2017], three—major companies. Is this the start of something big?