Corporate Governance

April 2017
Topics
Part I: New Paradigm of Corporate Governance
Growing Recognition of Threat of Short-Termism
●
● New Paradigm of Corporate Governance

Part II: Corporate Governance Landscape

Corporate Governance Trends
●
● Director Duties
●
Risk Management
●
Board Structure
●
Director Elections and Other Voting Issues

Part III: Shareholder Activism

Shareholder Activism Trends
●
● Economic Shareholder Activism
● Proxy Contests
● Corporate Social Responsibility

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Growing Recognition of Threat of Short-Termism
The Conference Board report on decreased capital investment and increased shareholder payouts.

●
Academic studies discrediting notion that short-termism, activist attacks and shareholder-centric
● governance tend to enhance long-term value.

Recognition by several major institutional investors that while an activist attack might boost the
market price of one portfolio investment, the defensive reaction of other portfolio companies
(advised to “manage like an activist”) may damage the long-term value of the portfolio.
●
Calls by BlackRock, State Street, Vanguard and other investors for corporations to resist
financial engineering, pursue long-term strategies, embrace transparency and engage with
● their investors on a regular basis to cultivate an understanding of performance and strategy.
Selected activists seeking to distinguish themselves from short-term focused peers (e.g.,
● more collaborative approaches; longer horizons; criticism of “greenmail” tactics).
Legal & General Investment Management’s letter to boards of London Stock Exchange’s 350
●
largest companies supporting the U.K.’s discontinuation of quarterly reporting.
Then-Director of SEC Division of Corporate Finance’s acknowledgement of calls from
●
commentators “to
re-think the need for quarterly reporting by U.S. issuers.”

●
Major non-U.S. institutional investors sponsor launch of the S&P Long-Term Value Creation Global
● Index.
U.K. Prime Minister May’s post-Brexit-vote speech emphasizing (among other things) focus on
long-term business strategy and greater corporate transparency.

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New Paradigm of Corporate Governance
A “New Paradigm” of corporate governance is emerging that:
●
Prioritizes sustainable value over short-termism;
●
Integrates long-term corporate strategy with substantive corporate governance;
● Requires transparency on director involvement; and
May also reduce outsourcing of governance and portfolio oversight to proxy advisors and activists.

●
Clearly articulated plans are necessary to gain and keep their support. A company should not leave an
●
opening for an activist with a more attractive long-term plan.

Companies should communicate board participation in the development and approval of strategy in
●
letters to these investors, annual reports and proxy statements.
Management of environmental and social issues is important to these investors.
●
Companies should develop and communicate procedures for engagement by management and directors
●
with these investors, and should facilitate direct engagement with directors if these investors request it.
Companies should support national policies encouraging long-term value creation.
Stock repurchases at the expense of long-term investment are disfavored.
●
There is no need for quarterly earnings guidance, if a company has a clearly articulated long-term strategy.
●
●

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New Paradigm of Corporate Governance (cont’d)

Roles and Responsibilities in the New Paradigm

Corporation Investors

• Prioritize long-term strategy and • Engage and communicate with

performance corporations
• Support long-term strategies
• Engage, communicate and foster
meaningful long-term relationships with • Help corporations correct long-term
strategies or failures to execute on them
investors

• Position the board to oversee and partner • Adopt integrated long-term investment
approach
with the CEO and management team
• Organize the business of the board in a manner • Disclose policies and preferences
citizenship and ESG/CSR matters into
that ensures matters requiring board or
committee attention are appropriately
prioritized, while maintaining collegiality

• Get the right mix of directors in the

boardroom

Source: “The New Paradigm,” World Economic Forum (Martin Lipton).

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Corporate Governance Trends (cont’d)
Proxy access and independent chair shareholder proposals dominated the governance landscape in the 2015
●
and 2016 proxy seasons, with proxy access proposals receiving relatively strong shareholder support.

Declassification and majority voting proposals have waned as these practices have been more widely adopted.
●
Proposal topics continue to proliferate (e.g., “value creation committee” to consider break-up of company;
● priority to repurchases over dividends; “backing out” of buybacks in calculating executive compensation).

90
84
80 81

70

60 62
58
55
50
# Proposals

52 45
40
33
40 30
27 27 28
30
23
19 20
20 17 19
14 12 14 15 24
12
11 16 16
10 6
13 1511
4 5 4 4 4 5 13
0 2 0 2 0 2 8
0 3 3 3
2016 2015 2014 2013 2016 2015 2014 2013 2016 2015 2014 2013 2016 2015 2014 2013 2016 2015 2014 2013 2016 2015 2014 2013

Proxy Independent Shareholder Shareholder Declassify Majority

Access Chair Power to Act Power to Call Board Vote
by Written Special Standard
Consent Meetings

Voted Shareholder Proposals Passed

Source: ISS.
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Economic Shareholder Activism
Objective: to make the company engage in “value-maximizing” activity (but short-term demands often conflict
●
with long-term value creation).

Demands Tactics
• Merger • Accumulate stake (stealthily)
• Sale of company • Divide board/management
• Spin-off/sale of division • Threaten public action
• Termination of transaction • Conduct extensive/aggressive diligence
• Tax optimization • Behave adversarially on analyst calls
• Increased merger consideration
• Appraisal rights
• New capital structure/allocation • Engage in PR/social media campaigns
• Increased/special dividend
• Share buyback • Propose precatory proxy resolution
• Oppose strategic/M&A plans
• Call special meeting/act by written consent
• Demand books and records

The past decade has seen a remarkable increase in the amo

●
Source: Activist Insight.
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Proxy Contests (cont’d)

Proxy Contest Outcomes

Proxy Campaigns (2010–2014) Winner After Vote

Withdrawn Went to a
23% Vote
Activist
34% Management
51%
Settled
43% Split
7%

Total: 452 Proxy Fights Total: 152 Votes (77 Management

Wins, 64 Activist Wins, 11 Splits)

Proxy Campaigns (2015–2016) Winner After Vote

Pending
1%

Withdrawn Management
Went to a
21% Vote 64%
32%
Activist
Settled 33% Split
45%
3%

Total: 214 Proxy Fights Total: 69 Votes (44 Management

Wins, 23 Activist Wins, 2 Splits)
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