Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Governance

DUTCH UPDATE – Dutch cooling-off period in face of shareholder activism or hostile take-over

Editor’s Note: Leo Groothuis advises clients on public M&A and on a wide variety of other domestic and cross-border transactions, as well as take-over defenses and shareholder activism. Paul van der Bijl focuses on IPOs, follow-on offerings, public M&A, anti-takeover defenses, corporate governance and complex cross-border transactions

Dutch cooling-off period in face of shareholder activism or hostile take-over

On December 7, 2018, the Dutch government published draft legislation aimed at promoting a careful decision-making process in case of shareholder activism or a hostile takeover. If enacted in its current form, the proposal would introduce a statutory cooling-off period of up to 250 days during which the shareholders meeting would not be able to dismiss, suspend or appoint board members of a listed Dutch company under attack.

Scope

The legislation would apply to companies organized under Dutch law whose shares (or depository receipts for shares) are listed on a regulated market or multilateral trading facility operating in the European Economic Area, or on any similar stock exchange operating outside the European Economic Area, including Nasdaq and NYSE.

Conditions to invoke the cooling-off period

The board of a listed Dutch company under attack may invoke a cooling-off period of up to 250 days in case:

  1. shareholders, using either their shareholder proposal right or their right to request an extraordinary shareholders meeting[1], propose an agenda item for the shareholders meeting relating to the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters); or
  2. a public offer for the company is made or announced without the company’s support, provided, in each case, that such proposal or offer materially conflicts with the interests of the company and its business, as determined by the board.

The cooling-off period ends at occurrence of the earliest of the following events:

  1. the expiration of 250 days following the date of the relevant shareholder proposal or hostile offer;
  2. the hostile offer being declared unconditional (after the expiration of the initial acceptance period); or
  3. the board (voluntarily) terminating the cooling-off period.

Effects of the cooling-off period

During the cooling-off period, the shareholders meeting cannot validly resolve on the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters), unless proposed by the board itself.

Judiciary review

Shareholders representing 3% or more of the issued share capital may request the Enterprise Chamber of the Amsterdam Court of Appeal for early termination of the cooling-off period. The Enterprise Chamber must deny the request if the board, in view of the circumstances at the time the cooling-off period was invoked, could reasonably have come to the conclusion that the relevant shareholder proposal or hostile offer constituted a material conflict with the interests of the company and its business.

Consultation and transparency

During the cooling-off period, the board must gather all relevant information necessary for a careful decision-making process. In this context, the board must also consult with relevant stakeholders, including shareholders representing 3% or more of the issued share capital. Formal statements expressed by these stakeholders during such consultations must be shared with other stakeholders who are consulted by the board. Ultimately at the end of the cooling-off period, the board must publish a report in respect of its policy and conduct of affairs during the cooling-off period. This report should be tabled for discussion at the next shareholders meeting.

Combination with protective measures and/or existing response period

In an explanatory note, the Government indicates that it is opposed to accumulation of the cooling-off period with protective measures and/or the existing response period under the Dutch Corporate Governance Code. However, the draft legislation does not provide any specific restrictions in this respect. The rules in respect of potential combination or successive application of the various measures available to companies organized under Dutch law should be developed in market practice and case law.

There are a number of interesting differences between the existing response period under the Dutch Corporate Governance Code and the new proposed statutory cooling-off period, which are summarized in the table below.

Existing response period

Proposed cooling-off period

Follows from the Dutch Corporate Governance Code and is considered part of the general principles of reasonableness and fairness which should be observed by all stakeholders (including shareholders).

Mandatory Dutch law (once enacted), binding upon all shareholders.
Up to 180 days. Up to 250 days.
Can be invoked if shareholders propose an agenda item which could result in a change to the company’s strategy, including (but not necessarily limited to) the dismissal of board members. Can be invoked if shareholders propose the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters), or in case of a hostile offer
Allows the board to postpone a shareholder proposal during the response period (both as a discussion and as a voting item)

Allows the discussion of a shareholder proposal during the cooling-off period, but prevents a valid resolution in respect of the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters).

 

A common feature of the existing response period and the proposed cooling-off period is the postponement of a shareholder vote during a standstill period invoked by the board. This distinguishes them from more traditional protective measures under Dutch law, such as the issuance of preference shares or priority shares, which (i) are typically activated by an independent foundation and (ii) are focussed on the outcome of the vote, rather than the timing thereof.

Compliance with European rules

Based on advice from the Dutch Council of State (which has also been published), the Government is of the opinion that the proposed legislation does not violate European rules. Relevant rules include in this respect:

  1. the European Takeover Directive: the proposed legislation does not interfere with the course of any public take-over itself; merely with the adoption of certain shareholders resolutions during the offer period;
  2. the European Shareholders Rights Directive: the Government makes a distinction between the convocation of shareholders meetings and the inclusion of items on the agenda of the meeting, and the valid adoption of shareholders resolutions in respect of such items (only the former, and not the latter being subject to the European Directive);
  3. the European freedoms: the Government acknowledges that the proposed legislation could have a restrictive effect on European freedoms, but is of the opinion that such restrictive effect is justified by the public interest of a careful decision making process and proportionality.

Next steps

The general public is invited to submit comments on the draft legislative proposal before February 7, 2019. Following review of the comments and potential revision of the proposal, the legislative proposal may be submitted to Dutch parliament.

[1] The statutory thresholds for shareholders to make use of those rights are 3% and 10%, respectively, unless the company’s articles provide for a lower threshold.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Spotlight on Boards

Editor’s Note: This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

December 3, 2018

Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:

  • Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy from global, political, social, and technological developments;
  • Determine the board’s response to proposed legislation like Senator Elizabeth Warren’s bill, Accountable Capitalism Act, which would federalize all companies with annual revenues of $1,000,000,000, preempt state corporation law and mandate board fiduciary duty to all stakeholders, not just shareholders, and require not less than 40% of the directors be elected by employees;
  • Be aware that ESG and sustainability have become major, mainstream governance topics that encompass a wide range of issues, such as climate change and other environmental risks, systemic financial stability, labor standards, employee training, and consumer and product safety;
  • Recognize the current focus of investors on “purpose” and an expanded notion of stakeholder interests that includes employees, customers, communities, and the economy and society as a whole and work with management to develop metrics to enable the company to demonstrate their long-term value to shareholders, society and the economy;
  • Set the “tone at the top” to create a corporate culture that gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing both operating and strategic goals;
  • Choose the CEO, monitor the CEO’s and management’s performance and develop and keep current a succession plan;
  • Have a lead independent director or a non-executive chair of the board who can facilitate the functioning of the board and assist management in engaging with investors;
  • Together with the lead independent director or the non-executive chair, determine the agendas for board and committee meetings and work with management to ensure that appropriate information and sufficient time are available for full consideration of all matters;
  • Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;
  • Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;
  • Oversee and understand the corporation’s risk management and compliance efforts and how risk is taken into account in the corporation’s business decision-making; respond to red flags if and when they arise;
  • Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate corporate governance proposals, and work with management to anticipate possible takeover attempts and activist attacks in order to be able to address them more effectively, if they should occur;
  • Meet at least annually with the team of company executives and outside advisors that will advise the company in the event of a takeover proposal or an activist attack;
  • Be open to management inviting an activist to meet with the board to present the activist’s opinion of the strategy and management of the company;
  • Evaluate the board’s and committees’ performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;
  • Review corporate governance guidelines and committee charters and tailor them to promote effective board and committee functioning;
  • Be prepared to deal with crises; and
  • Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.

To meet these expectations, major public companies should seek to:

  • Have a sufficient number of directors to staff the requisite standing and special committees and to meet investor expectations for experience, expertise, diversity, and periodic refreshment;
  • Compensate directors commensurate with the time and effort that they are required to devote and the responsibility that they assume;
  • Have directors who have knowledge of, and experience with, the company’s businesses, even if this results in the board having more than one director who is not “independent”;
  • Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings and engaging with investors;
  • Provide the directors with the data that is critical to making sound decisions on strategy, compensation and capital allocation;
  • Provide the directors with regular tutorials by internal and external experts as part of expanded director education and to assure that in complicated, multi-industry and new-technology companies the directors have the information and expertise they need to evaluate strategy; and
  • Maintain a truly collegial relationship among and between the company’s senior executives and the members of the board that facilitates frank and vigorous discussion and enhances the board’s role as strategic partner, evaluator, and monitor.

Martin Lipton

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 

DUTCH UPDATE – Shareholders’ Rights Directive implementation bill now before Parliament

Editor’s Note: Leo Groothuis advises clients on public M&A and on a wide variety of other domestic and cross-border transactions, as well as take-over defenses and shareholder activism. Geert Raaijmakers specializes in corporate governance, corporate structuring and joint ventures and on pension fund governance.  Maarten Buma and Suzanne Rutten specialize in corporate law. 

Shareholders’ Rights Directive implementation bill now before Parliament

On 16 October 2018, the bill for the implementation in Dutch law of the revised Shareholders’ Rights Directive (EU 2017/828) was submitted to the lower house of the Dutch parliament (Tweede Kamer). In this newsletter, we will describe the changes in the bill compared to the earlier consultation version published on 27 February 2018, which was the subject of our newsletter dated 9 March 2018.

RENUMERATION POLICY

The consultation version of the bill contained a new provision on the remuneration policy of listed companies. This gave rise to confusion, because the Dutch Civil Code (“DCC”) already contains a provision on the subject. Under the bill as submitted to Parliament, it has now been clarified that listed companies will be subject only to the new provision, which will become section 2:135a(5) DCC. This sets out the information that must be given in the company’s remuneration policy, some of which is already required. New items of information that will be required include:

  • an explanation of the way in which the policy contributes to the company’s business strategy, long-term interests and sustainability;
  • an explanation of the decision-making process followed for the policy’s determination, review and implementation; and
  • in the event that the policy is revised, a description and explanation of how it takes into account the votes and views of shareholders on the policy and remuneration reports since the most recent vote on the policy by the general meeting of shareholders.

In the case of the remuneration report it has likewise been clarified that listed companies will be subject only to the new section 2:135b DCC, which sets out a number of new requirements in addition to existing ones. It should be noted, however, that pursuant to section 2:135b the current requirements in sections 2:383c-e DCC will continue to apply. One of the new items of information that will be required is an explanation of how the total remuneration complies with the remuneration policy and how it contributes to the company’s long-term performance. All information must be given in respect of each individual management board member.

TRANSACTIONS WITH RELATED PARTIES

The bill introduces the term “material transactions” (unlike the consultation version, which referred to “significant transactions”) and sets out a definition in which price sensitivity is taken as the point of departure. A transaction will be material if it meets both of the following two criteria:

  1. the information about the transaction constitutes inside information under the Market Abuse Regulation (Regulation (EU) 596/2014); and
  2. the transaction is concluded between the company and a related party (as defined under the International Accounting Standards). Related parties in any event include:
    • one or more shareholders who individually or collectively represent at least 10% of the company’s issued share capital (“stichting administratiekantoor” foundations and foundations holding preference shares can fall within this category);
    • members of the company’s management board; and
    • members of the company’s supervisory board.

A provision has been added prohibiting a management board member or supervisory board member from participating in the decision making on a related party transaction in which that board member is involved. Lastly, the period over which non-material transactions with the same related party must be aggregated, potentially resulting in an obligation to disclose those transactions, has been changed from 12 months to “the same financial year”.

TRANSPARENCY REGARDING LONG-TERM SHAREHOLDER ENGAGEMENT

The definition of “asset manager” has been amended to clarify that it refers to those providing asset management services to institutional investors. The term “proxy advisor” has been replaced with “voting advisor” (stemadviseur), as this is more in line with the terminology commonly used in the Netherlands, including in the Dutch Corporate Governance Code. In addition the obligation on the part of institutional investors and asset managers to disclose and explain “the most significant votes”, and the possibility of excluding “insignificant votes” in this regard, have been elaborated upon.

The proposed reporting requirements overlap with those imposed under other EU directives and regulations, such as the AIFM, UCITS and MiFID II directives. The explanatory memorandum to the bill clarifies that it will be sufficient if asset managers include the relevant information in their other reports or include references to such information (for example using hyperlinks), provided it is made clear to the relevant institutional investors where the information can be found.

NEXT STEPS

The deadline for the implementation of the Directive in national law is 10 June 2019. It is possible that the bill will be amended as it makes its way through Parliament. We will of course keep you updated on any significant amendments and on the entry into effect of the new legislation. It is also worth mentioning that both the government and the Corporate Governance Code Monitoring Committee are of the opinion that, in connection with the implementation of the Directive, the section of the Code relating to shareholders should be re-examined; we will likewise inform you of any developments on that front.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

The Future of the Corporation

Editor’s Note: This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

November 7, 2018

The Future of the Corporation

A project of the British Academy—“The Future of the Corporation” reached a major milestone on November 1, 2018 with the public discussion of a framework and supporting papers.  The project is led by Oxford Prof. Colin Mayer.

In his framework, Prof. Mayer puts forth a radical reinterpretation of the nature of the corporation that focuses on the corporate purpose, its alignment with social purpose, the trustworthiness of companies and the role of corporate culture in promoting purpose and trust.  This view of the corporation rejects shareholder primacy—that the sole social purpose of the business corporation is to maximize shareholder wealth.

Instead, Prof. Mayer “puts forward an alternative approach that emphasizes the role of corporate purpose, commitments, trustworthiness and culture in which companies specify their purposes, clarify their associated commitments and demonstrate how their ownership, governance, performance measurement and management enable them to fulfil their obligations. Corporate and social purposes are aligned in companies and activities of particular social significance but not necessarily elsewhere.”

Prof. Mayer would implement his view of the corporation of the future by:

  • The starting point should be to recognize that the purpose of corporations is not simply to maximize shareholder value.
  • Corporations should specify their corporate purposes.
  • They should clarify the commitments that they make to the different parties to the firm associated with their purposes.
  • They should demonstrate how they can be trusted to uphold their commitments.
  • In particular they should record how their ownership, governance, performance measurements and incentives promote commitments to their purposes.

The ways in which corporations are encouraged to demonstrate commitment to purpose are in Prof. Mayer’s view:

  • Corporate law should require companies to specify their corporate purposes.
  • It should enable companies to adopt structures that are best suited to the delivery of their purposes.
  • It should require companies to demonstrate how their ownership, governance, performance measurements and incentives encourage them to commit to the delivery of their purposes.
  • It should require certain classes of companies that perform particular public and social functions, such as utilities, banks and companies with significant market power to align their corporate with their social purposes.
  • The regulatory system should promote an alignment of corporate with social purposes where required and ensure that companies’ ownership, governance, measurement and incentive systems are appropriate for this.

The foregoing and much more is set forth in a just-published, must-read book by Prof. Mayer, Prosperity.  The Mayer proposal for corporate governance and the policy changes that are necessary to develop it will return corporations to long-term sustainable investment, combine profitable operations with adherence to ESG and CSR principles, and sharply reduce short-termism and activist attacks.

Interestingly, on the same day as the British Academy program, the British Government agreed to amend the law to make it clear that pension plans have a fiduciary duty to protect long-term value by considering environmental risks of the companies in which they invest.  The British Government stated that the new rules “will push consideration of long-term value and environmental risks down the investment chain to investee firms.”

The objectives of the British Academy project parallel those of the World Economic Forum’s The New Paradigm:  A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, the difference being the means by which they are achieved.  The latter by voluntary action by corporations and investors, the former by legislation.  Recent actions by the British Government and proposed legislation such as the Accountable Capitalism Act introduced in August 2018 by Senator Elizabeth Warren show that legislation impacting both corporations and investors is a distinct possibility.  The case for change is compelling.  One way or the other, Prof. Mayer’s concept of the corporation of the future will be achieved.

Martin Lipton

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Board Ready: Shareholder Activism, Corporate Governance and the Hunt for Long-Term Value

Editor’s Note: This article was authored by Sabastian V. Niles of Wachtell, Lipton, Rosen & Katz.

 

Board Ready: Shareholder Activism, Corporate Governance and
the Hunt for Long-Term Value

* A modified version of this article was recently featured in a publication for public company directors, CEOs and general counsels.

As the spotlight on boards, management teams, corporate performance and governance intensifies, as articles like the Bloomberg and Fortune profiles of Elliott Management (“The World’s Most Feared Investor—Why the World’s CEOs Fear Paul Singer” and “Whatever It Takes to Win—How Paul Singer’s Hedge Fund Always Wins”) and other activist investors become required reading in every boardroom and C-suite, and as activist campaigns against successful companies of all sizes increase worldwide, below are fifteen themes expected to impact boardroom, CEO and investor behavior and decision-making in the coming years.

  1. The CEO, the Board and the Strategy.
  2. Activism Preparedness Grows Up.
  3. Companies Standing Up, Playing Offense and Showing Conviction without Capitulation. 
  4. Activists Standing Down. 
  5. “Shock, Awe & Ambush” Meets the Power of Behind the Scenes Persuasion. 
  6. Better Index IR and Not Taking the Passives (or Other Investors) for Granted. 
  7. Quarterly Earnings Rituals.
  8. Embracing the New Paradigm and Long-Termism.
  9. Convergence on ESG and Sustainability. 
  10. Dealing with the Proxy Advisory Firms.
  11. Board Culture, Corporate Culture and Board Quality. 
  12. Capital Allocation. 
  13. Directors as Investor Relation Officers. 
  14. The General Counsel as Investor Relations Officer. 
  15. The Nature of Corporate Governance.

1. The CEO, the Board and the Strategy.

  • The relationship of the CEO with fellow directors will remain the most important, overriding corporate relationship a CEO has.
  • Strengthening that relationship, addressing disconnects openly and directly, and ensuring internal clarity and alignment between the board and management should be prioritized before an activist, takeover threat or crisis emerges.
  • Boards of directors will become more actively involved with management in developing, adjusting and communicating the company’s long-term strategy and operational objectives and anticipating threats to progress.

2. Activism Preparedness Grows Up.

  • Instead of a check-the-box housekeeping exercise, companies will pursue real readiness for activist attacks.
  • Activism preparedness will be integrated into crisis preparedness, strategic planning and board governance.
  • This will include periodic updates for the board by expert advisors working with management; non-generic break glass plans; a philosophy of continuous improvement and rejecting complacency; training, simulations and education informed by live activism experiences; expert review of bylaws and governance guidelines; and cultivating third-party advocates early.
  • Most importantly, deep self-reflection and self-help will identify opportunities for strengthening the company and increasing sustainable value for all stakeholders, mitigating potential vulnerabilities, getting ahead of investor concerns and ensuring that the company’s strategy and governance is well-articulated, updated and understood.
  • The CEO and other directors will be prepared to deal with direct takeover and activist approaches and handle requests by institutional investors and activists to meet directly with management and independent directors.

3. Companies Standing Up, Playing Offense and Showing Conviction without Capitulation. 

  • Well-advised companies will take a less reactive posture to activist attacks, find opportunities to control the narrative, strengthen their positioning and leverage with key investors and stakeholders and understand investor views beyond the activist.
  • Directors and management will maintain their composure and credibility in the face of an activist assault and not get distracted or demoralized.
  • Companies will proactively take action and accelerate previously planned initiatives with wide support to demonstrate responsiveness to investor concerns without acceding to an activists’ more destructive or short-sighted demands.
  • If a legitimate problem is identified, consider whether the company has a different (better) approach than the one proposed by the activist, and if the activist’s idea is a good one, co-opt it.
  • Companies with iconic brands and a track record of established trust will protect – and appropriately leverage – their brands in an activist situation.
  • Negotiating and engaging with an activist from a position of strength rather than fear or weakness will become more common.

4. Activists Standing Down.

  • Through deft handling and prudent advice, more activist situations will be defused and never become public battles, including where the activist concludes they would be better served by moving on to another target.
  • Companies who move quickly to pursue the right initiatives, maintain alignment within the boardroom and engage in the right way with key shareholders and constituencies will achieve beneficial outcomes, gain the confidence of investors beyond the activist and, where dealmaking with an activist is needed, find common ground or obtain favorable settlement terms.

5. “Shock, Awe & Ambush” Meets the Power of Behind the Scenes Persuasion.

  • Until activism evolves, boards and management teams will continue to grapple with activists who mislead, grandstand, goad, work the media, threaten and bully to get their way.
  • But major investors will increasingly reject such irresponsible engagement and more interesting flavors of activism will emerge, led by self-confident and secure funds who value thoughtful, private discussions as to how best to create medium-to-long-term value, respect that boards and management teams may have superior information and expertise and valid reasons for disagreeing with an activist’s solutions, and pursue collaborative, merchant banking approaches intended to assist a company in improving operations and strategies for long-term success without worrying about who gets the credit.
  • In some situations, working with the right kind of activist and showing backbone against misaligned activist funds and investors will deliver superior results.

6. Better Index IR and Not Taking the Passives (or Other Investors) for Granted.

  • BlackRock, State Street and Vanguard will continue to bring their own distinctive brands of stewardship, engagement and patient pressure to bear in the capital markets and at their portfolio companies.
  • Companies will increasingly recognize that a classical “governance roadshow” promoting a check-the-box approach to governance without a two-way dialogue is a missed opportunity to demonstrate to these funds that the company’s strategic choices, board and management priorities and substantive approach to governance deserve support from these investors.
  • More sophisticated and nuanced approaches for gaining and maintaining the confidence of all investors will emerge.
  • Engagement for engagement’s sake will fall out of favor, and targeted, thoughtful and creative approaches will carry the day.

7. Quarterly Earnings Rituals.

  • While quarterly earnings rituals will remain, for now, a fact of life in the U.S., companies and investors will explore alternatives for replacing quarterly rhythms with broader, multi-year frameworks for value creation and publishing new metrics over timeframes that align with business, end market and operational realities. Giving quarterly guidance will fall out of favor and be increasingly criticized.
  • In the U.K. and other jurisdictions that permit flexibility, more companies will move towards non-quarterly cadences for reporting and issuing guidance and seek to attract more long-term oriented investor bases by publishing long-term metrics.
  • In all markets, companies will increasingly discuss near-term results in the context of long-term strategy and objectives, more management time will be spent discussing progress towards important operational and financial goals that will take time to achieve and sell-side analysts will have to adapt to a more long-term oriented landscape or find their services to be in less demand.

8. Embracing the New Paradigm and Long-Termism.

  • The value chain for alignment towards the long-term across public companies, asset managers, asset owners and ultimate beneficiaries (long-term savers and retirees) – each with their own time horizons, goals and incentives – is now recognized as broken.
  • Organizations and initiatives like Focusing Capital on the Long Term, the Coalition for Inclusive Capitalism, the World Economic Forum’s New Paradigm and Roadmap for an Implicit Corporate Governance Partnership to Achieve Sustainable Long-Term Investment and Growth, the Conference Board, the Strategic Investor Initiative, the Aspen Institute’s Business & Society Program and Long-Term Strategy Group and others will increasingly collaborate and perhaps consolidate their efforts to ensure lasting change in the market ecosystem occurs.
  • Additional academic and empirical evidence will be published showing the harms to GDP, national productivity and competitiveness, innovation, investor returns, wages and employment from the short-termism in our public markets.
  • Absent evidence that private sector solutions are gaining traction, legislation to promote long-term investment and regulation to mandate long-term oriented stewardship will be pursued worldwide.

9. Convergence on ESG and Sustainability.

  • Companies will increasingly own business-relevant sustainability concerns, integrate relevant corporate social responsibility issues into decision-making and enhance disclosures in appropriate ways, while resisting one-size-fits-all approaches delinked from long-term business imperatives.
  • ESG-ratings services will come under heightened pressure to improve their quality, achieve consistency with peer services, eliminate errors and proactively make corrections or retract reports and ratings.
  • Activist hedge funds will continue to experiment with ESG-themed or socially responsible flavored campaigns to attract additional assets under management, drive a wedge between companies and certain classes of ESG-aligned investors and try to counter their “bad rap” as short-term financial activists who privilege financial engineering and worship the immediate stock price.
  • Mainstream investors will increasingly try to apply and integrate ESG-focused screens and processes into investment models.

10. Dealing with the Proxy Advisory Firms.

  • While proxy advisory firms will increasingly become disintermediated, including through efforts like the U.S. Investor Stewardship Group (ISG) and increased investments by active managers and passive investors in their own governance teams and policies, proxy advisors will retain the power to hijack engagement agendas and drive media narratives.
  • More scrutiny will be brought to bear when advisory firms overreach, where special interests drive a new proxy advisory firm policy and if investors reflexively follow their recommendations.
  • Especially in contested situations, winning the support of the major proxy advisory firms is valuable, but well-advised companies will succeed in convincing investors to deviate from negative recommendations and in special cases persuading advisory firms to reverse recommendations.
  • Negative recommendations will be managed effectively without letting the proxy firm dictate what makes sense for the company.

11. Board Culture, Corporate Culture and Board Quality.

  • Leaders who promote a board culture of constructive support and engaged challenge and who foster a healthy and inclusive corporate culture will outperform.
  • Vibrant board and corporate cultures are valuable assets, sources of competitive advantage and vital to the creation and protection of long-term value.
  • Board strength, composition and practices will be heavily scrutinized, including as to director expertise, average tenure, diversity, independence, character, and integrity.
  • Nuanced evaluations of the ongoing needs of the company, the expertise, experience and contributions of existing directors, and opportunities to strengthen the current composition will be integrated into proactive board development plans designed to enable the board’s composition and practices to evolve over time.
  • Failure to evolve the board and its practices in a measured way will expose companies to opportunistic activism and takeover bids.
  • Boards and management teams who know how to navigate stress, pressure, transition and crisis will thrive.

12. Capital Allocation.

  • Investors will have more heated debates among themselves and with companies about preferred capital allocation priorities, both at individual portfolio companies and at an industry level.
  • Companies will be more willing to reinvest in the business for growth, pursue smart and transformative M&A that fits within a longer-term plan to create value and make the case for investments that will take time to bear fruit by explaining their importance, timing and progress.
  • Prudently returning capital will remain a pillar of many value creation strategies but in a more balanced way and with more public discussion of tradeoffs between dividends versus share repurchases and alternative uses.
  • Investors may not agree with choices made by companies and will disagree with each other.

13. Directors as Investor Relation Officers.

  • While management will remain the primary spokesperson for the company, companies will better prepare for director-level interactions with major shareholders and become more sophisticated in knowing when and how to involve directors – proactively or upon appropriate request – without encroaching upon management effectiveness.
  • Directors will be deployed carefully but more frequently to help foster long-term relationships with key shareholders.
  • However, directors will need to be vigilant to ensure the company speaks with one voice and guard against attempts by investors to pursue inappropriate one-off engagements and foster mixed messages.

14. The General Counsel as Investor Relations Officer.

  • The general counsel (or its designee, such as the corporate secretary or other members of the legal staff) will play an increasingly central role in investor relations functions involving directors, senior management and the governance and proxy voting teams at actively managed and passive funds alike.
  • Board and management teams will look to the general counsel to advise on shareholder requests for meetings to discuss governance, the business portfolio, capital allocation and operating strategy, and the board’s practices and priorities and to evaluate whether given demands of corporate governance activists will improve governance or be counterproductive.

15. The Nature of Corporate Governance.

  • Questions about the basic purpose of corporations, how to define and measure corporate success, the weight given to stock prices as reflecting intrinsic value, and how to balance a wider range of stakeholder interests (including employees, customers, communities, and the economy and society as a whole) beyond the investor will become less esoteric and instead become central issues for concern and focus within corporate boardrooms and among policymakers and investors.
  • Measuring corporate governance by how many rights are afforded to a single class of stakeholder – the institutional investor – will be seen as misguided.
  • Corporate governance will increasingly be viewed as a framework for aligning boards, management teams, investors and stakeholders towards long-term value creation in ways that are more nuanced and less amenable to benchmarking and quantification.

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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