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The Latest Director Concerns

More than half of the directors in PwC’s 2015 Annual Corporate Director’s Survey believe proxy access is appropriate for shareholders owning at least 5% of a company’s shares for at least five years or more. 27% believe proxy access never makes sense. However, proxy access is the most widely discussed governance initiative in boardrooms over the past year. The PwC report explains the responses of 783 public company directors. 74% of those directors serve on the boards of companies with more than $1 billion in annual revenue.

The top three director concerns are increasing demands on the audit committee, potential new cybersecurity regulations and activism.
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Anticipating the Impact of Board Retirement Policies

EY reports that in the next five years, almost 20% of directors at S&P 1500 companies may be poised to leave their boards. The estimate is calculated based on the number of directors who are currently age 68 and have tenures of 10 years or longer, along with an average retirement age of 72 for Fortune 100 companies.

Director retirement and tenure policies are among the ways that companies seek to refresh their boards. According to EY, 83% of Fortune 100 boards have retirement-age policies, with 61% set at age 72 and 28% set at age 75. Four companies increased their retirement ages last year, and none lowered it.
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Survey Shows Retail Investors Open to Shareholder Activist Viewpoints

A recent survey by the Brunswick Group counters beliefs that retail investors are always “pro-management” in any voting contest.  The survey examined the views of 801 US-based individuals who play an active role in their personal investment decisions.

Two-thirds are aware of shareholder activism and 74% think shareholder activism adds value to companies “by pushing corporate executives and boards to make decisions about issues that company management is otherwise unwilling to make.”  Most of these investors say that activists force companies to aim for long-term value creation for shareholders, while only a slight majority indicate that companies are already doing enough to return value to shareholders. 
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CalSTRS Issues Board Composition Best Practices

In two pages, CalSTRS sets forth their expectations on board composition practices, an area of increasing attention by investors. 

On board tenure, CalSTRS does not advocate for strict limits and instead proposes that a mix of short- and long-tenured directors provides both fresh perspectives and experience, continuity and stability on the board.  Tenure and age limits may force turnover, but CalSTRS believes that regular evaluation of the needs of the company is more important to ensure board refreshment.  They urge companies to disclose a board succession plan and the process used to evaluate board composition and director performance, including a periodic third-party evaluation.
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Business Groups Form Governance Coalition to Combat Activism and Volume of Regulation

A number of business groups sent a letter to Chair White announcing the formation of the Corporate Governance Coalition for Investor Value (the Coalition).  The group includes the American Bankers Association, the U.S. Chamber of Commerce, SIFMA, the National Association of Manufacturers and ten others.

The Coalition emphasizes the importance of strong corporate governance in driving shareholder value, and notes that communication and engagement between their member companies and their shareholders are “at an all-time high.” However, companies have seen an increase in “special-interest activism of all types.” The Coalition believes that this activism has led to campaigns that are unrelated to increasing long-term shareholder interest, while at the same time diminishing the role of boards of directors in their oversight.
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Delaware Legislature Supports Ban on Fee-Shifting, Endorses Exclusive Forum

Last week, the Delaware House of Representatives unanimously passed a bill that amends the Delaware General Corporation law to prohibit stock corporations from inserting “fee-shifting” provisions in their governance documents.  We previously discussed the bill here.  The Delaware Senate passed the same bill in May and it is expected to be signed by the governor.  The effective date is August 1, 2015.

The bill prohibits public companies from having provisions in either their charters or bylaws that would “impose liability for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim,” which would generally include M&A litigation.
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SEC Rulemaking Petition Wants Information on Director Nominees’ Gender, Race and Ethnicity

A group of nine public pension fund fiduciaries has filed a rulemaking petition with the SEC to ask for new disclosure about the gender, race and ethnicity of director nominees in proxy statements, along with a discussion of those individuals’ skills and experiences that the SEC rules already mandate.

Specifically, the petition asks that the current disclosure of nominee qualification and skills should be in a chart or matrix form and include additional information as to the nominee’s gender, race and ethnicity.  The chart is intended to convey attributes identified by the board as minimum requirements for all directors or as necessary for one or more of the directors to possess, and should be presented in XTML format to enable aggregation across companies.
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Possible Delaware Legislation on Fee-Shifting and Exclusive Forum Provisions

As is the practice from time to time, the Corporation Law Section of the Delaware State Bar Association has proposed amendments to the Delaware General Corporation Law (the DGCL) for the Delaware Legislation to pass.

The proposed legislation prohibits a company’s certificate of incorporation and bylaws from containing a fee-shifting provision, or in other words, a provision “that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an intracorporate claim.” 30 companies have adopted these provisions and 6 companies have gone public with them.

The synopsis indicates that the DGCL amendment is not intended to disturb the ruling in ATP Tours related to nonstick corporations, or prevent the application of these types of provisions pursuant to a stockholders’ agreement.
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Vanguard Focuses on Engagement in Letters to Companies

The CEO of Vanguard has issued letters regarding shareholder engagement to the independent chair or lead director of approximately 500 of Vanguard’s largest holdings. The letter is published on Vanguard’s website, and discusses the importance of effective engagement for both shareholders and boards, with the “best boards” working to seek feedback and perspectives independent of management, and engagement functioning as a dialogue with both parties listening to and informing each other.

The letter emphasizes that there is no assumed optimal structure for engagement and no one-size-fits-all engagement program, but rather, boards should create a process that meets their needs and the needs of their shareholders.
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Delaware Legislature Urged to Address Fee-Shifting Bylaws

Amalgamated Bank’s LongView Funds has written to several Delaware representatives, including the state governor, urging immediate legislative action to clarify that the “American rule,” in which each side in litigation bears its own costs, is applicable for stock corporations notwithstanding the decision in the ATP Tour case last year, which we previously discussed here.

Noting that they were the lead plaintiff in the Enron case, as one example, Amalgamated states that most securities cases settle after significant discovery has taken place, which requires substantial legal expense. Traditionally, exceptions to the “American rule” that have been made by other legislative branches of government have in fact generally favored plaintiffs, such as in employment discrimination cases.
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A Legal Challenge to a Bylaw Requiring Minimum Number of Shareholders Before Lawsuits Can Be Brought

Imperial Holdings’ shareholders have sued the company and its board over a bylaw that the board adopted last November. The bylaw requires that a current or prior shareholder may not initiate a claim in a court of law against the company, its directors or officers, unless the shareholder obtains the written consents of at least 3% of the outstanding shares. 

The plaintiffs allege that the purpose of the bylaw is to reduce the risk of defendants being held liable to the company or its shareholders for violations of law, and that the bylaw creates an onerous obstacle designed to prevent shareholders from exercising their statutory rights.
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Darden Board Makes Significant Changes to Its Corporate Governance Practices

After a bruising proxy contest, Darden Restaurants announced last month several meaningful changes to its corporate governance practices, some of which will be voted on by shareholders at the 2015 annual meeting. 

Majority Voting for Director Elections. The company amended its bylaws to require a majority voting standard for uncontested director elections. The company previously had a director resignation policy, which this board also changed. Rather than providing for board discretion to accept or reject a director resignation if the director does not receive majority support, a director who is not elected by a majority of votes cast will remain on the board only until the board appoints another director. 
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Changes in Board Composition for Large-Cap Companies

The 2014 Spencer Stuart US Board Index for S&P 500 companies focuses on board composition, turnover and director succession planning. The report concluded that companies that added three or four new directors in a three-year period outperformed their peers, and although the worst performers included those companies with no change in board composition at all during that time, boards that added five or more new directors also fared poorly. 

Attention continues to intensify around the length of board service. At the largest companies, the average director tenure is 8.4 years, while 16% have tenure of 11 or more years. It appears that directors are older, with the average age being 63.
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Insights from Vanguard’s Chairman and CEO: Corporate Governance Should Not Be a Mystery

Directors can provide more insight on how they govern their companies, and investors can give more information on how they cast their votes, so that there is less mystery from both sides, stated Vanguard Chairman and CEO F. William McNabb in a recent speech at the University of Delaware’s Weinberg Center for Corporate Governance.

According to McNabb, Vanguard is the world’s largest mutual fund and owns about 5% of every U.S. public company, and the fact that they are “permanent shareholders” as an index fund is exactly the reason that they care about good governance.

Engagement was the primary focus of his discussion, and the impetus behind the more than 900 letters Vanguard sent to U.S.
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Database of Fortune 500 Companies’ Compliance Codes and Policies

A database of compliance policies for Fortune 500 companies, launched by the University of Houston Law Center, should help companies that want to benchmark their protocols.

The free database contains the 2012 and 2013 policies at the largest companies. It covers a wide range of over 40 topics, including codes of conduct, whistleblower reporting, conflicts of interest, related person transactions, political activities, insider trading, export controls, intellectual property, money laundering, antitrust, social media, and numerous FCPA-related policies. It can be searched by company name and three types of policies, three companies across three types of policies or by SIC code.

According to its press announcement, social media policies have exploded since 2011, showing 150% growth with 220 companies reporting them in 2013, compared to 88 in 2011.
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The Latest on Fee-Shifting Bylaws

24 companies have adopted fee-shifting bylaws since May, according to Professor John Coffee in his testimony before the SEC Investor Advisory Committee. Fee-shifting bylaws impose a “loser pays” rule that transfers a company’s costs and expenses in shareholder litigation to the plaintiff shareholder if the plaintiff is unsuccessful.  

The concept gained momentum after the Delaware Supreme Court upheld such a bylaw adopted by a Delaware non-stock corporation as “facially valid.” As Professor Coffee notes, even in that case (ATP Tour, Inc. v. Deutscher Tennis Bund), the court indicated that a legally permissible bylaw that is adopted for an improper purpose will not be enforceable.
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CII Wants Proxy Disclosure of Board Evaluation Process

In the midst of the clamor for disclosure reform that questions whether the current regime requires too much information in public filings, the Council of Institutional Investors (CII) wants companies to provide additional detail about their board evaluation processes.

In its report, “Best Disclosure: Board Evaluation,” surveyed CII members said they value detailed disclosure of the board evaluation process when deciding on director elections. CII makes clear that investors do not expect information about the results of the actual evaluations, but believe that the process discussion “…is an indication that a board is willing to think critically about its own performance on a regular basis and tackle any weaknesses.”
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Interesting Findings from NIRI’s Earnings Call Survey

A vast majority of companies have adopted similar practices and protocols for their earnings calls, but there were some notable differences and perhaps a few surprises, from the results of a survey conducted by the National Investor Relations Institute (NIRI). The full report is available only to members but the highlights are listed here

Earnings calls are widely embraced as useful communication tools, evidenced by the fact that 97% hold them quarterly. 94% are conducted by telephone and 89% through webcasting. Companies also share the same methods for announcing the calls, with 93% issuing press releases and 83% posting to the company website.
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The Trend for Fee-Shifting Bylaws

The numbers keep changing, but the latest report indicates that six public (or soon-to-be-public) companies have adopted fee-shifting provisions in charters and bylaws since the Delaware court ruling in May that such provisions may be valid, in a case involving a non-stock company. 

All are small, and none are in the Russell 3000 index at the moment. Two of the companies have only recently filed IPO registration statements, with the information contained in risk factors or general information disclosure and those incorporation documents are not available yet.  One company just went public in June as a limited partnership.

Only Biolase Inc.
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Group Seeks Regulatory Requirement for Disclosure on Reasons That Directors Who Do Not Receive Majority Support Remain on Their Boards

85% of directors at Russell 3000 companies who failed to receive majority support for their election remain on those boards two years later, a recent study by the Committee on Capital Markets Regulation found.  The Committee recommends that the SEC require boards that retain directors who did not achieve majority support publicly disclose in some form the specific reasons for the boards’ decisions that those directors should remain.    

The Committee indicates that its mission is dedicated to enhancing the competitiveness of U.S. capital markets and ensuring the stability of the U.S. financial market, and its membership includes a former SEC commissioner and a range of business leaders as well as those in academics.
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Getting The Deal Through – Corporate Governance 2014

Davis Polk lawyers have authored the “Global Overview” chapter of Getting The Deal Through – Corporate Governance 2014, an annual guide that examines issues relating to board structures and directors’ duties in 33 jurisdictions worldwide.

Corporate governance continues to be a hot topic worldwide this year, but for different reasons in different regions. In the U.S. portion of the chapter, we discuss the continuing influence of proxy advisory firms, the increasing willingness of large institutional investors to engage in governance outreach and recent trends in governance bylaw amendments and shareholder proposals.

We also speculate where the tides may be heading on board tenure and other governance topics.
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Chair White Speaks on Director and Shareholder Engagement as Part of What Directors Should Know About the SEC

Among the usual exhortations regarding directors’ responsibilities for setting the correct “tone at the top” and establishing a strong compliance culture in Chair White’s recent speech on what directors should know about the SEC, she also made recommendations pertaining to directors’ role in shareholder engagement and shareholder proposals.

The role of directors as “essential gatekeepers upon whom…investors, and frankly, the SEC rely” was emphasized several times by Chair White, given directors’ fiduciary responsibilities that require them to oversee the company. She stated that directors need to understand the company’s business model, associated risks, financial condition, industry and competitors, and not only listen to what senior managers say but “also listen for the things they are not saying.” 
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Commissioner Aguilar Urges Boards to Ensure Oversight of Cybersecurity Risks

The recent announcement that ISS has recommended against the election of the board of directors of Target because of the perceived failure to provide appropriate management of cyber-risk should “put directors on notice to proactively address the risks associated with cyber-attacks,” according to Commissioner Luis Aguilar in a recent speech.

Commissioner Aguilar discussed what boards should do to ensure that their organizations are appropriately considering and addressing cyber-risk, as there can be little doubt that cyber-risk, and a company’s cybersecurity measures, must be considered as part of a board’s overall risk oversight.  He warned that boards that choose to ignore or minimize the importance of cybersecurity oversight responsibility do so at their own peril, in light of the litigation risk. 
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State Street’s Director Tenure Policy Contains Specific Lengths of Service Screens and May Result in Votes against Directors

State Street Global Advisors’ (SSgA) 2014 voting policy on director tenure focuses on what it identifies as the need for “board refreshment.” The policy outlines situations that could trigger the investor to vote against directors at its investee companies due to lengthy tenures. Unlike other major investors and even the proxy advisory firms, SSgA has provided specific guidance relating to the number of years of service it deems to be excessive, based on comparison with the average director term for the particular market.

According to ISS’ analysis included in SSgA’s policy, the average director tenure in the US market is 8.6
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