Securities Mosaic® Blogwatch
July 23, 2019
Cahill Gordon Discusses Justice Department Credit for Antitrust Compliance Programs
by Brock Bosson, Elai Katz, Lauren Rackow, Bradley J. Bondi and Charles A. Gilman

In an effort to incentivize investment in robust antitrust compliance programs, the Antitrust Division of the U.S. Department of Justice (“DOJ”) announced on July 11, 2019 that companies may now receive credit at charging and sentencing for effective antitrust compliance programs – a change from DOJ’s former policy.[1] The DOJ has historically not rewarded existing antitrust compliance programs at the charging stage of a criminal investigation, instead giving immunity only to qualifying first reporters under its leniency program.[2]  While the DOJ plans to continue to limit the use of non-prosecution agreements to the first company to invoke leniency successfully, deferred prosecution agreements will be available for qualifying companies with robust antitrust compliance policies.[3] The DOJ published guidance for prosecutors evaluating corporate compliance programs at the charging and sentencing stages that we discuss more fully below.[4]

Principles for evaluating antitrust compliance programs at the charging stage

The DOJ established key principles for evaluating an antitrust compliance program at the charging stage: First, whether the compliance program is well-designed. Second, whether the program is being applied earnestly and in good faith. And third, whether the program works. The DOJ looks to three preliminary questions and nine elements or factors for an effective compliance program.

Preliminary Questions: 1) Does the company’s compliance program address and prohibit criminal antitrust violations?  2) Did the antitrust compliance program detect and facilitate prompt reporting of the violation?  And 3) To what extent was a company’s senior management involved in the violation?

Next, the following nine elements or factors should be considered when evaluating the effectiveness of an antitrust compliance program:

Design and comprehensiveness: The DOJ seeks to know whether a compliance program is appropriately tailored, reviewed, and implemented. This factor looks to the format of the program, whether it was formalized in writing, whether it underwent periodic review, and its level of accessibility to employees to report potential violations. This factor examines whether the antitrust training was given to employees and the document retention process.

Culture of compliance: The DOJ looks for an organization that actively fosters an environment that encourages ethical behavior in compliance with antitrust law. This factor evaluates how senior leaders have conveyed the importance of compliance through their words and actions. The direct involvement of senior managers and accountability contribute to the analysis of this factor.

Responsibility for the compliance program: This examines who has the autonomous responsibility to ensure compliance, such as a chief compliance officer, to whom and how they report, whether they also have non-compliance duties, and whether they have the proper training and experience to effectively observe antitrust issues.

Risk assessment: Risk assessment means whether the program is tailored to detect the forms of misconduct most likely in the company’s industry. This should be subject to periodic review, and it should have the resources allocated to it that the industry would demand to detect violations.

Training and communication: Whether employees are trained in antitrust compliance obligations to know more clearly what actions are prohibited and how to resist pressure to act unlawfully. Relevant triggers, such as communication with a competitor, should be taught, and an employee should be able recognize legitimate business practices. This factor will take into account the code of ethics, the promulgation of antitrust policies, who receives compliance training and how often, and whether the training includes an evaluation.

Periodic review, monitoring, and auditing: A program should not be static, as changes in an industry affect the requirements of the compliance. This looks to the methods used to evaluate effectiveness and how changes are made.

Reporting: This factor examines whether there is a publicized process to report or seek guidance on potential flags of antitrust violations and if it is periodically reviewed, including the company’s commitment to investigating reports and whether employees feel free to report without fear of negative consequences.

Incentives and discipline: A program should use carrot and stick techniques. Promotions, awards, bonuses, formal discipline, and reconsideration of employment are tools that a company has to ensure compliance.

Remediation and role of compliance program in the discovery of a violation: Prosecutors are directed to consider the remedial efforts undertaken by the company. This looks to the thoroughness and commitment to addressing violations. Prompt action in investigating the violation, why it occurred, and changing policies to prevent its reoccurrence are important to the DOJ. Whether the company reported the violation and the time it took to do so are further considerations.

Evaluating compliance programs at the sentencing stage

The new Guidance Document provides that Division prosecutors should now evaluate whether to recommend a sentencing reduction for a company’s effective antitrust compliance program in three ways.  Firstly, a company may receive a reduction in a culpability score when it is determined that the company has an effective compliance program (provided the company did not unreasonably delay reporting the alleged violation). Second, an existing and effective compliance program may also influence whether a company receives probation.  Finally, the effectiveness of the compliance program may be relevant to evaluate the appropriate fine.[5]


The advantages and potential benefits of a strong compliance program have increased significantly as a result of this announcement. A company with a robust and effective compliance program may be able to negotiate a deferred prosecution agreement, even if it is not the first to report a violation, and it may obtain a reduced sentence as well.  Companies may take the new guidance as an opportunity to revisit or establish comprehensive antitrust compliance programs.


[1] Makan Delrahim, Wind of Change: A New Model for Incentivizing Antitrust Compliance Programs, Remarks at the New York University School of Law (July 11, 2019),

[2] DOJ deleted text in its Justice Manual that previously stated the Antitrust Division’s policy “that credit should not be given at the charging stage for a compliance program.” U.S. Dep’t of Justice, Antitrust Division Announces New Policy to Incentivize Corporate Compliance (July 11, 2019),

[3] Makan Delrahim, Wind of Change: A New Model for Incentivizing Antitrust Compliance Programs, Remarks at the New York University School of Law (July 11, 2019),

[4] U.S. Dep’t Justice, Antitrust Div., Evaluation of Corporate Compliance Programs (July 2019), (“Guidance Document”).

[5] Id. at 14-17.

This post comes to us from Cahill Gordon & Reindel LLP. It is based on the firm’s memorandum, “DOJ Antitrust Division to Credit Antitrust Compliance Programs at Charging & Sentencing Stages of Criminal Investigations,” dated July 17, 2019, and available here.

July 23, 2019
Four Things No One Will Tell You About ESG Data
by Sakis Kotsantonis and George Serafeim

In a recent article, we seek to shed light on several important aspects of measuring and providing data about companies’ performance on environmental, social, and governance (ESG) issues. The article is intended to provide a useful guide for the rapidly rising number of people entering fields involving such issues. We focus on the following:

  • The sheer variety, and inconsistency, of the data and measurements and how companies report them. Listing more than 20 different ways companies report their employee health and safety data, we show how such inconsistencies lead to significantly different results when looking at the same group of companies.
  • “Benchmarking,” or how data providers define companies’ peer groups, can be crucial in determining the performance ranking of a company. The lack of transparency among data providers about peer group components and observed ranges for ESG metrics creates market-wide inconsistencies and undermines their reliability.
  • The differences in how ESG researchers and analysts deal with vast data gaps that span ranges of companies and time periods can cause large disagreements among the providers, with different gap-filling approaches leading to big discrepancies. We provide the example of estimating employee turnover for a leading airline and show how different models produce different data.
  • The disagreements among ESG data providers are not only large but increase with the quantity of publicly available information. We interpret this finding as evidence of the need for a clearer understanding of what different ESG metrics might tell us and how they might best become standards for assessing corporate performance.

What can be done to address these problems with ESG data?

Companies should take control of the ESG data narrative by shaping disclosure instead of being overwhelmed by survey requests. To that end, companies should customize their metrics to some extent, while at the same time seeking to self-regulate by reaching agreement with industry peers on a reasonable baseline of standardized ESG metrics that allow various companies’ performances to be compared. We understand that companies may want to convey the uniqueness of their business models by customizing their reporting practices.  At the same time, we believe that most companies should be able to accept and work with a reasonable baseline for reporting standards.  Organizations like the Sustainability Accounting Standards Board (SASB) have made significant progress in providing such a baseline.  Taking control of the ESG data narrative can also help with one of the major frustrations of sustainability departments, “survey fatigue.” Many companies have identified the need to come together as industries and take control of the narrative that gets communicated to their investors.  An example of such efforts has occurred in the U.S. electric utilities industry. The Edison Electric Institute, the association that represents all U.S. investor-owned electric companies, assembled a working group of companies and investors to develop industry-focused and investor-driven ESG reporting practices.   The outcome of the working group was a simple reporting template that includes an excel-based tool for utilities to use when reporting qualitative as well as quantitative information. Taking a similar approach, a project run by KKS Advisors and sponsored by the Rockefeller Foundation is creating Industry ESG working groups that aim to bring together leading companies within an industry and their major long-term investors to agree on certain ESG issues and metrics. The goal is to promote collaboration among companies to solve common sustainability issues by developing industry standards, generating data, and creating industry knowledge. To achieve this goal requires effective communication with investors.

For investors, our message is to push for meaningful disclosure of metrics by narrowing the demand for ESG data.  In the past, investors have made vague and, in many ways, unfocused requests for data.  As a recent study found, the most important barrier for the use of ESG data in investment decisions is the lack of comparability of metrics across companies and across time.  Investors should agree on a baseline of indicators and metrics that would be informative on a core set of ESG issues that are of prime importance, such as climate change, labor conditions, and diversity.

Stock exchanges should give serious consideration to issuing guidelines for and even mandating ESG disclosure.  The exchanges can be the coordinating mechanism, working with companies, investors, and regulators to design smart disclosure guidelines. The Sustainable Stock Exchanges initiative is an effort taking us in that direction, exploring how exchanges together with investors, regulators, and companies can enhance corporate transparency.

Data providers need to agree on best practices and become as transparent as possible about their methodologies and the reliability of their data. In discussing the methods they use to assess a company’s performance, data providers should include not only a list of material issues and a description of their scoring methodology, but more detail on the peer groups used, and clearly distinguish between actual data and data that they infer from other factors. Data providers could also establish some best practices for assessing performance that could be followed by the whole industry—which could be especially helpful in the case of diversified businesses.

This post comes from Sakis Kotsantonis, managing partner of KKS Advisors, and George Serafeim, the Charles M. Williams Professor of Business Administration at Harvard Business School. It is based on their paper, “Four Things No One Will Tell You About ESG Data,” available here.

July 23, 2019
First Successful Use of a Universal Proxy Card for a Control Slate in the United States
by Andrew Freedman, Elizabeth Gonzalez-Sussman, Mohammad Malik, Steve Wolosky, Olshan Frome Wolosky

On July 10, 2019, shareholders at EQT Corporation (“EQT” or the “Company”) overwhelmingly voted for a control slate of directors nominated by a shareholder group led by Toby Z. Rice, Derek Rice, Will Jordan and Kyle Derham (the “Rice Team”). Interestingly, this proxy contest involved the use of a universal ballot, a first in the United States involving a control slate of directors, in which all of the company and dissident’s nominees appeared on their respective proxy cards.

EQT is the largest natural gas producer in the United States. In November 2017, the Rice Team sold the company they had founded, Rice Energy, to EQT, for approximately $6.7 billion. Unfortunately, within a year following the acquisition, EQT’s operational performance severely declined, with its shares falling 39% last year. Following a massive operational loss in the third quarter of 2018, many shareholders reached out to Toby Z. Rice for help. Despite efforts to engage with EQT privately, the Rice Team’s offers to help were rebuffed, forcing the Rice Team to call for the replacement of the CEO and nominate a control slate of directors.


As part of the nomination process, the Rice Team was required to deliver to EQT consents from each of its nominees to be named in the Company’s proxy materials. We are seeing this tactic employed in increasing fashion by many companies, which can give companies an unfair advantage in potentially naming one or more of a dissident’s nominees in the company’s proxy statement, while not providing reciprocal consents to the nominating shareholder to name some or all of the company’s nominees in the dissident’s proxy statement. The Rice Team sought to level the playing field by seeking a waiver of this requirement, but EQT would not grant one. Accordingly, the Rice Team had to submit its nomination with the required consents, but requested the use of a universal ballot in which all of the nominees would be named on a single proxy card. Due to EQT’s silence with respect to this request, the Rice Team filed a lawsuit against the Company to prevent the Company’s unfair use of the Rice Team’s nominee consents. In response to the lawsuit, EQT publicly agreed to the use of a universal ballot.

The universal ballot adopted by both EQT and the Rice Team named both EQT’s and the Rice Team’s nominees on their respective proxy cards. The only difference related to the presentation of the two cards, in which each side highlighted how it desired shareholders to vote. Copies of the two cards can be found here (Rice Team) and here (EQT). As shown, the Rice Team made clear on its proxy card a recommendation for all seven of its nominees and for five of the Company’s nominees that it did not oppose, to permit shareholders to vote for all 12 available spots. Similarly, the Company recommended a vote for all 12 of its nominees and against the Rice Team’s nominees, other than existing director, Daniel Rice IV, who was nominated by both EQT and the Rice Team.

The Rice Team obtained public support from many of EQT’s largest shareholders, including T. Rowe Price Group Inc., D.E. Shaw & Co., Kensico Capital Management Corp. and Elliott Management Corp., along with proxy advisory firms Institutional Shareholder Services (“ISS”) and Egan-Jones Ratings.

The use of a universal ballot for a majority slate of directors is unprecedented and, in our view, may become more common in future proxy contests given the Rice Team’s success here. In fact, ISS noted the following in its report recommending that shareholders vote for all of the Rice Team’s nominees on the Rice Team’s universal proxy card:

“The adoption of a universal card was an inherently positive development for EQT shareholders (as it would be in any proxy contest), in that it will allow shareholders to optimize board composition by selecting candidates from both the management and dissident slates.”

It is unfortunate that many companies are adding a requirement that nominees consent to being named in the company’s proxy materials without the same consent given by the company’s nominees to the nominating shareholder. Companies should either have a two-way consent requirement or no consent requirement to ensure a level playing field for the company and the activist in the solicitation of proxies. Activists should not have to resort to litigation to ensure a fair election process. Elections should be based on the merits and not on legal shenanigans. We hope today’s outcome motivates companies to refrain from these types of games in future contests.

July 23, 2019
How Much Do Directors Influence Firm Value?
by Aaron Burt, Christopher Hrdlicka, Jarrad Harford

Every company has a board of directors. Debates rage over whether they do their job; what is the ideal mix of insiders and outsiders, men and women, management and labor; and whether directors are too busy or whether busyness is an outcome of quality. But until now, we have not even been able to answer the most basic question: How much do directors actually influence the value of companies?

To be fair, this is a hard question to answer. Much about boards is unobservable. Board meetings are private, with the minutes only rarely being made public. Directors work with management outside of these meetings, making it impossible to see all the relevant interactions. Worse, we cannot simply look at arrivals and departures of directors because of the endogenous matching between a director and company.

Narrowing the question to particular events like mergers and acquisition have allowed a glimpse of director influence. Natural experiments such as mandates on the female fraction of boards or the unexpected death of a director also show boards matter. The effects of directors have even been traced to commonality in events such as switching exchange listings, or commonality in practices, such as similar tax minimization strategies. Taken together, prior studies have shown a vast array of director influence in specific instances, but they cannot answer how much do directors influence firms overall. Their answers are limited both because they utilize only a subset of events and because there is no obvious way of aggregating over the events studied.


In our paper How Much Do Directors Influence Firm Value? which is forthcoming in the Review of Financial Studies, we utilize the fact that directors sit on multiple boards to provide an unconditional measure of the value influence of a director. We find that, on average, a director’s influence causes variation of 1% of aggregate market capitalization per year. For perspective, our sample’s average annual variation in market value is 14.5%. This 1% swing from a single director’s influence accounts for 6.5% of the total observed volatility. Knowing that directors wield such influence makes the debates over optimal board structure and regulation even more important.

Our measure is based on a new method that exploits the commonality in news across firms which share directors. If directors matter in the sense of influencing their firms, then when a director is seated on two boards, the comovement of those firm’s stock should increase. We document this increased comovement using the network of shared directorships between 1996 and 2015. To eliminate other potential sources of comovement (such as common risk factor exposures), we use the idiosyncratic returns of one firm in a linked pair as a signal of a director’s actions or influence and study the subsequent price responses at the other firm in the pair.

If this signal is value-relevant, then the price at the other firm should respond in the same direction. This assumes the director influences firms the same way on average, making this measure an understatement of the true influence if directors provide more nuanced influence on firms. This common response can operate through three channels: (1) linked firms announce similar outcomes; (2) the market learns of news at the first firm and the price of the second firm reacts in anticipation of a similar outcome; (3) the market learns about the director’s general quality and the price of the second firm responds. (Figure 3 of the paper illustrates two examples of the first channel.) In all three cases we use the market’s processing of information unavailable to us as econometricians and policy makers to glean the importance of the shared director.

We translate this signal into the value of a director by forming a trading strategy. Each month we sort firms into 5 portfolios by the ranking of the previous month’s idiosyncratic returns for the other firms which their directors oversee. We buy firms with directors whose other firms did well the previous month and short firms with directors whose other firms did poorly. Value-weighting this strategy gives a long-short alpha of 9% per year.

By averaging across firms in this strategy, unrelated noise averages out to zero, leaving only the value impact of the common event—the shared director. Thus, the alpha of this long-short strategy is equivalent to an event study’s average abnormal return of a set of firms having the most extreme director events in a given month. Because we know the probability of being included in the long or short portfolio (approximately 10% each), we can generalize beyond a typical event study and convert this conditional value measure to the unconditional value measure of 1% of market cap variation per year.

The strategy’s positive alpha implies that investors do not fully monitor directors in real time. If investors monitor the real-time performance of all the firms a director advises, any cross-firm information should be simultaneously reflected in the prices of all the connected firms, eliminating any trading profit. In particular, the limited attention appears concentrated in the director’s influence at small firms. This limited attention to directors has implications for how directors build reputation and improve their labor market outcomes.

For our measure to have the interpretation of value influence, we establish exogeneity of the link in several ways. We show the results are robust to other known economic links between firms such as common industry, customer-supplier relationships, strategic alliances and geographic location of firms. We show the common comovement is limited to the linkage period and that the delay in the comovement is stronger when the director linkage is harder to discern (e.g., is not in machine-readable datasets). One would not expect predictability to vary with this publicity under other alternative hypotheses for the comovement.

The complete article is available for download here.

July 23, 2019
Under Pressure: Directors in an Era of Shareholder Primacy
by Christopher Couvelier, Jim Rossman, Quinn Pitcher, Lazard

The job of the public company director has never been as challenging as it is in 2019. Today’s directors must execute their core duties while juggling a cacophony of often competing voices: activist investors; increasingly vocal “traditional” owners; index and pension funds wielding the power of their vote; shareholders demanding action on environmental, social and governance issues; employees and unions; local and national political leaders; social media; and of course management itself. Where does a director’s duty reside in this complex landscape? And amid this dissonance, how should today’s director prioritize these many demands?

In pursuit of answers to these questions, Lazard recently hosted “Under Pressure: Directors in an Era of Shareholder Primacy,” an event attended by over 150 directors representing over 200 public companies around the world. The event began with a panel discussion moderated by Dennis K. Berman (Managing Director, Lazard Shareholder Advisory) and featured representatives from academia, regulators, investors and public companies:


  • Robert J. Jackson, Jr., Commissioner, SEC
  • Samuel Liss, Director, Argo Group and Verisk Analytics and Managing Principal, Whitegate Partners
  • Mark D. Mandel, Vice Chair, Senior Managing Director, Partner and Equity Portfolio Manager, Wellington Management
  • Aeisha Mastagni, Portfolio Manager, Sustainable Investment & Stewardship Strategies, CalSTRS
  • Lynn S. Paine, John G. McLean Professor of Business Administration and Senior Associate Dean for International Development, Harvard Business School

The panel was followed by a keynote conversation between Tim J. Buckley (Chairman and CEO, Vanguard) and Kelly Evans (Anchor, “The Exchange” and “Power Lunch,” CBNC).

Briefly summarized below are some of the key themes that, in our opinion, emerged from the event.

A rising tide of shareholder and stakeholder demands—often in conflict—is increasing pressure on today’s public company director

  • Secular trends in asset management have fundamentally altered the profile of public company ownership, and numerous types of shareholders are demanding that their voices be heard in the boardroom
  • The rise of index funds has created a concentrated class of “permanent capital” focused on the corporate governance topics most likely to affect value creation potential over the very long term
  • Traditional active managers—under pressure to drive outsized returns to justify their fee structures—are expanding their toolkit to include forceful dialogue with companies and, in extreme cases, vocal, public agitation
  • A changing culture of political pressure and social awareness is shining a spotlight on social purpose, corporate culture, human capital management and environmental and sustainability issues
  • Amid these heightened demands, questions regarding the appropriate role of the board abound: How long is “long term”? How does the “maximizing shareholder value” paradigm address stakeholder interests? Should corporations pay for social and environmental change?

Directors should raise their “collective intelligence” by proactively defining and implementing bespoke norms and objectives

  • Though shareholders of all types have become comfortable sharing their ideas for value creation, no investor shares the board’s fiduciary duty towards the company
  • As such, a core function of an effective board in today’s market is to exercise judgment in processing and prioritizing competing feedback
  • Rather than aspiring to externally defined “best practices”, boards should establish customized norms and a shared understanding of objectives and responsibilities so that all decision making is calibrated to the company’s strategic priorities
  • Boards should proactively set a time horizon for strategic objectives; although the disparate interests of shareholders and stakeholders may converge over a long enough period, it is incumbent on directors to operate within their own strategic timeframe
  • For the board’s bespoke norms and objectives to be most effective, careful consideration should be given to how frequently they are revisited and how they are disclosed to the investment community

Directors should have a detailed understanding of the investors they represent and craft a shareholder engagement strategy accordingly

  • Boards should routinely be educated regarding the composition of the shareholder base they represent (by investor type and management style) and the key reasons why certain investors do or do not own the company
  • With shareholders demanding more transparency from their stewards in the boardroom, directors should proactively execute a shareholder engagement strategy that prioritizes relationships with the largest, longest-term holders (including passive funds)
  • All engagement should be rooted in disclosure that compellingly articulates a company’s long-term value creation narrative; appropriate disclosure provides a strong foundation on which issuers can build stable, supportive relationships with investors
  • Shareholder engagement aptitude should be considered as a factor in director selection and board refreshment

Executive compensation has the potential to further escalate as a “lightning rod” issue for shareholders

  • Shareholders expect directors to devise a tailored compensation program that clearly incentivizes the achievement of well-defined strategic priorities
  • Investors view a board’s decisions about executive compensation as a window into directors’ thinking on important issues of strategy, culture, succession planning and talent retention
  • As the complexity of compensation programs and disclosure has increased, shareholders have become more prone to opposing say-on-pay, particularly when the absolute quantum of compensation appears excessive
  • The historical practice of deferring to outside compensation consultants may cease to pass muster as an appropriate way to design a compensation program

Public policy responses to evolving shareholder dynamics may soon be forthcoming

  • Efforts to reform “proxy plumbing” seek to leverage technology to modernize the basic mechanics of corporate democracy, including the casting and counting of votes
  • The proxy advisory industry continues to be in the crosshairs, with transparency regarding decision making and conflicts and the ability for companies to respond to proxy advisor recommendations receiving particular attention
  • The increasingly complex shareholder environment is one of many factors contributing to a decades-long decline in the number of newly-listed U.S. public companies; whether and how to stem this trend is front of mind for legislators and regulators
  • There is a growing consensus that combating ESG risks will require significant investment; “maximizing shareholder value” may prove to be an inadequate compass for navigating a new era in which shifts in capital allocation are required to address these risks
July 23, 2019
Buybacks: The “Replace” Part of “Repeal & Replace” Rule 10b-18
by John Jenkins

Last week, Liz blogged about a recent rulemaking petition filed by a coalition of labor & progressive groups requesting the SEC to repeal & replace the Rule 10b-18 “safe harbor” under which most buybacks have been conducted.

The request to “repeal” 10b-18 is pretty straightforward, but what’s the “replace” part of the equation supposed to look like? The petitioners suggest that the SEC look at some 1970s-era proposals to limit buybacks, and point out that those proposals included:

– Limiting repurchases to 15 percent of the average daily trading volume for that security.
– Creating a narrower safe harbor and allowing repurchases that fall outside this safe harbor to be reviewed and approved on an individualized, case-by-case basis.
– Providing that repurchases inconsistent with the safe harbor are expressly “unlawful as fraudulent, deceptive, or manipulative.”
– Requiring various disclosures, including whether any officer or director is purchasing or disposing of the issuer’s securities, the source of funds to be used to effect the repurchases, the impact of the repurchases on the value of the remaining outstanding securities, and specific disclosures for large repurchases.

Companies continue to repurchase “massive amounts” of their own stock, and the market seems to be addicted to buybacks as well. So far, the SEC hasn’t seemed inclined to do much to further regulate buybacks, and tinkering with 10b-18 seems unlikely. But a presidential election’s looming, buybacks are getting clobbered in the media, & Democratic presidential hopefuls have them in the cross-hairs. When you throw into the mix the recent introduction of legislation that would ban open market buybacks, the SEC may at some point be faced with a situation where if it doesn’t act, Congress might.

ISS Policy Survey: Board Gender Diversity, Over-Boarding & More

Yesterday, ISS opened its “Annual Policy Survey.” In recent years, ISS used a 2-part survey, with a relatively high-level “governance principles survey” accompanied by a more granular “policy application survey.”  This year, ISS is using a single survey with a more limited number of questions. ISS may have streamline the process, but this excerpt addressing the topics covered in the survey shows that they’ve still covered quite a bit of ground:

Topics this year cover a broad range of issues, including: board gender diversity, director over-boarding, and director accountability relating to climate change risk, globally; combined chairman and CEO posts and the sun-setting of multi-class capital structures in the U.S.; the discharge of directors and board responsiveness to low support for remuneration proposals in Europe; and the use of Economic Value Added (EVA) in ISS’ quantitative pay-for-performance, financial-performance-analysis secondary screen for companies in the U.S. and Canada.

As always, this is the first step for ISS as it formulates its 2020 voting policies. In addition to the survey, ISS will gather input via regionally-based, topic-specific roundtables & calls. Interested market participants will also have an opportunity to comment on the final proposed changes to the policies.

SEC “Short- v. Long-Term” Roundtable: So What Happened?

Last week, the SEC hosted its roundtable on short-term v. long-term management of public companies. As Broc blogged when the roundtable was announced, the roundtable follows the SEC’s December 2018 request for comment on earnings releases & quarterly reporting.  If you’re looking for a fairly detailed review of the discussion at the roundtable, check out this recent blog by Cooley’s Cydney Posner.

John Jenkins

July 23, 2019
Coming to Terms With Marrying Sustainability and Executive Compensation
by Mark Olsen

In 1970, influential economist Milton Friedman made a bold proclamation in an essay for The New York Times that changed the face of business ethics. Friedman famously argued that enterprises have just one social responsibility: increasing their profits. His greed-is-good ethos made life simple for Corporate America, which likely explains why it was so attractive to captains of industry.

When your only reason for being is to pass returns along to your shareholders, issues like environmental damage or diversity in the workplace can fall off your radar screen.

A recent Mercer study (summarized by Cooley’s PubCo blog) suggests that we appear to be entering the twilight of what has come to be known as shareholder theory. Instead, a growing number of shadow regulators such as institutional investors and corporate activists are demanding that companies account for their corporate governance practices, environmental and social impacts, and more. In the words of BlackRock CEO Larry Fink: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Prominent investment houses have joined BlackRock in prodding companies and their management teams to do more than stack their bank accounts. In fact, one of BlackRock’s peers, Prudential Financial Inc., is taking its own steps to align its executives’ incentives with the firm’s environmental, social and governance (ESG) platform.

In its most recent proxy statement, Prudential describes a carrot-and-stick approach:

In keeping with our commitment to diversity and inclusion in practice, the performance shares and units awarded to executives at the senior vice president level and above (and equivalents) in February 2018 were made subject to a performance objective intended to improve the representation of diverse persons among our senior management over the 2018 through 2020 performance period:

  • If we meet our goal of increased representation of diverse persons by five percentage points or more over this period, payouts will be increased by up to 10%.

  • If there is no change in representation, payouts will be decreased by 5%.

  • If such representation decreases over this period, payouts will be decreased by up to 10%.

Similarly, oil companies Chevron Corp. and Royal Dutch Shell are moving forward with plans to tie compensation packages to their goals for reducing greenhouse gas emissions.

Given the growing calls on Capitol Hill for companies to enhance climate-related corporate disclosures, sustainability targets seem likely to take on a greater role in executive compensation packages. If so, keep an eye on how companies establish performance metrics. Consensus on appropriate ESG standards is lacking. The new approach may leave compensation committees longing for the days when they only worried about the bottom line.

July 23, 2019
A Banner Proxy Season for Political Disclosure and Accountability
by Bruce Freed, Dan Carroll, Karl Sandstrom, CPA

Support for corporate disclosure and accountability reached new highs in the just concluded 2019 proxy season. This was demonstrated in the number of companies agreeing to disclosure and board oversight over the full range of their political spending and in the surge in shareholder support for the Center for Political Accountability’s model resolution. All of this reinforces earlier findings about “private ordering” making political disclosure and accountability the new norm for companies.

This proxy season’s strong results were a clear affirmation of trends seen over the past several years. Much of corporate America now sees political disclosure and accountability as in its self-interest and shareholders consider it an essential feature of good governance. This is occurring as companies navigate heightened risks posed by today’s hyper-polarized political environment.

Here are the topline results for this season:


The average vote was 36.4 percent at 33 companies that held annual meetings. That was up from 34 percent last year, when 18 resolutions went to a vote. In 2017, the resolution averaged 28 percent over the 22 resolutions that went to a vote.

CPA and its shareholder partners reached disclosure agreements and withdrew resolutions at 13 companies this year. That compares with three in 2018 and seven in 2017.

The 2019 Proxy Season breakdown is as follows:

  • Two majority votes in support of the resolution at Cognizant Technology Solutions Corp. (53.6%) and Macy’s Inc. (53.1%).
  • Eleven votes in the 40% range, including Kohl’s Corp. (49.8%), NextEra Energy Inc. (48.7%), Allstate Corp. (46.9%), Chemed (46.2%), Western Union Co. (44.3%), Fiserv Inc. (43.8%), Alaska Air Group (43.5%), Roper Technologies Inc. (43.0%), Netflix Inc. (41.7%), Centene Corp. (41.6%) and Nucor Corp (40.6%).
  • Twelve votes in the 30% range. The companies included Illumina Inc. (37.7%), Simon Property Group Inc. (37.1%), American Water Works Company Inc. (37.0%), Duke Energy Corp. (35.8%), Wyndham Destinations (35.6%), American Tower Corp. (35%), Royal Caribbean Cruises Ltd. (34.5%), Wynn Resorts Ltd. (34.4%) CMS Energy Corp. (34.3%), Equinix Inc. (34.2%), DTE Energy Co. (33.6%), and J.B. Hunt Transport Services Inc. (31.7%).

At 13 other companies, resolutions were withdrawn after the companies agreed to disclose their political spending and adopt board oversight and accountability policies. They include Alexion Pharmaceuticals Inc.; Ameriprise Financial Inc.; General Electric; Ball Corp.; Chubb Ltd.; Devon Energy; Hilton Worldwide Holdings Inc.; The Kroger Co., and Sysco Corp.; Mondelez International Inc.; MSCI Inc.; Tractor Supply Co.; and SVB Financial Group.

Beyond the votes and agreements, what was striking was what CPA and its shareholder partners learned from its discussions with companies: There is heightened sensitivity to the harm ill-considered political spending may have on company’s reputation, adversely impacting its relationship with its employees, customers and shareholders. One executive unprompted said, , that a controversial contribution can put it at a competitive disadvantage. . Others mentioned that they had read CPA’s Collision Course report, released last year, that examined the risks to companies when the consequences of their political spending conflicted with company core values and positions.

Overall, CPA and its partners found in this year’s dialogues an eagerness by companies to adopt or strengthen political disclosure and accountability policies. This followed the pattern seen over the past four years of S&P 500 companies steadily increasing their CPA-Zicklin Index scores for political disclosure and accountability policies.

July 23, 2019
SEC Charges Controller in Insider Trading Action
by Tom Gorman

Insider trading has long been a staple of SEC enforcement. Frequently the actions become complex, requiring an evaluation of elements such as the “personal benefit” obtained by the person with the confidential information or the knowledge of the information recipient about the source of the information and any breach of a duty. When, however, the trader is a finance executive at the company whose shares are traded, the proof difficulties are typically eased. That may be the case with the Commission’s most recently filed insider trading case, SEC v. Loman, Civil Action No. 2:19-cv-06187 (C.D. Calif. Filed July 18, 2019).

Defendant Mark Loman is the former Controller and Vice President of Finance of OSI Systems, Inc., a security, healthcare and optoelectronics company. Through his position with the firm Mr. Loman had access to a stream of confidential company financial information. That included, for example, advance knowledge of OSIS’s revenues and earnings as well as its Commission filed reports. Indeed, he was responsible for compiling internal reports for the firm and others. Under the firm’s insider trading policy, he was obligated to maintain the confidentiality of this information.

Shortly after the beginning of the firm’s 2016 fiscal year in August 2015, OSIS announced its forecasted fiscal revenue. The forecast was based on confidential, internal projections. In October and November 2015 – the first two months of the fiscal year – the financial results were materially below those projected. Thus, in early December the company revised its confidential internal forecast. By month end Mr. Loan and the firm knew that OSIS’ revenues would fall substantially below the revised projections.

On December 28 Mr. Loman purchased 100 put options on OSIS common stock with a strike price of $90. He also sold 100 call options on the firm’s stock with a strike price of $95. One month later, on January 27, 2016, OSIS announced its financial results for the second fiscal quarter which were below projection. The firm also released its forecast for the fiscal year. Following the release, the share price dropped from about $80 to $52. Mr. Loman sold the put options and let the call options expire. Collectively he realized $300,00 in trading profits on the transactions.

The next month Mr. Loman learned that OSIS was in negotiations to acquire publicly traded American Science and Engineering, Inc. On February 16, 2016, he discussed the acquisition with the company CFO who forward him the letter of intent. That letter stated that ASEI would be acquired for $32 to $38 per share.

As the deal negotiations continued Mr. Loman purchased ASEI shares. Specifically, on March 3, 2016 Mr. Loman purchased 10,000 shares at $24.91 per share. The blackout period on the transaction began on April 29, 2016, although Mr. Loman was notified the prior day.

The acquisition was announced on June 21, 2016. The price was $37 per share. The share price of ASEI’s stock rose to $36.96 by June 23, 2016. Mr. Loman sold his ASEI shares early on the morning of June 21, 2016, just prior to the deal announcement. Since the price had been trending up he had profits of over $100,000. In testimony before the staff Mr. Loman invoked his Fifth Amendment privilege. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24540 (July 18, 2019).

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7/23/2019 posts

CLS Blue Sky Blog: Cahill Gordon Discusses Justice Department Credit for Antitrust Compliance Programs
CLS Blue Sky Blog: Four Things No One Will Tell You About ESG Data
The Harvard Law School Forum on Corporate Governance and Financial Regulation: First Successful Use of a Universal Proxy Card for a Control Slate in the United States
The Harvard Law School Forum on Corporate Governance and Financial Regulation: How Much Do Directors Influence Firm Value?
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Under Pressure: Directors in an Era of Shareholder Primacy Blog: Buybacks: The “Replace” Part of “Repeal & Replace” Rule 10b-18
Blog – Intelligize: Coming to Terms With Marrying Sustainability and Executive Compensation
The Harvard Law School Forum on Corporate Governance and Financial Regulation: A Banner Proxy Season for Political Disclosure and Accountability
SEC Actions Blog: SEC Charges Controller in Insider Trading Action

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