Corporate Governance Overview - Current Issues

Introduction

This post provides a summary report on a collection of public company corporate governance topics, including the historical development of the issues, the positions adopted by major institutional investors and proxy advisory firms, and the current state of corporate America with respect to the topics covered.

Corporate governance refers to a panoply of issues, generally focused on the board of directors. A corporate board is the governing body for the company. The board sets corporate policy as well as, among other things, oversees company executives, decides executive pay, and assesses major transactions. In carrying out its role, a board must act in accordance with federal law, state law where the company is incorporated, and the corporate charter and bylaws. Additionally, board members are held to fiduciary duties like loyalty and care, which ensure that board members do not have conflicts of interest and act in an informed manner. Within these constraints, however, a board has plenary power to direct the corporation, which is why corporate governance focuses so intensely on the board.

The governance topics addressed in this memo fall into three areas: board composition, the selection of its members, and board committees. Board composition looks at the number of people on boards, the rise of independent directors, the increase in separate chairperson and Chief Executive Officer (“CEO”) roles, and the qualifications and characteristics of board members. Board selection looks at the shift from staggered to unitary boards, from plurality to majority share voting, and at the fight for proxy access, whereby shareholders can nominate their own director-candidates on the corporation’s proxy card. Finally, the board committee section looks more closely at two of the most important board committees – the audit and compensation committees. The structure of a board, implemented by a corporation’s position on these various topics, has important consequences for that company’s governance.

Yet no board, however structured, acts in a vacuum. Every American-incorporated company must hold a shareholder meeting at least annually. At these meetings, shareholders elect directors, vote on charter and bylaw amendments, and vote on major transactions. Shareholders might do their own diligence to decide how to vote on these proxy proposals, and many do conduct diligence, but they can also rely on the recommendations of proxy advisory firms. Proxy advisors research proposals, both generally and as proposed at any given corporation, and recommend that their clients vote for, against, or withhold their votes from proposals. The scale of proxy advisors importance is contested, but there is no doubt that they are influential. Therefore, as part of the memo’s examination of governance practices at public firms, it traces proxy advisors’ positions with respect to each governance topic, as well as any measurable impact they have had on the topic’s development.

Towards that end, the next section provides a short background on proxy advisors before addressing corporate governance.[1]

Proxy Advisors

The two major proxy advisory firms are Institutional Shareholder Services (“ISS”) and Glass Lewis.[2] They were founded in 1985 and 2003 respectively.[3] There is ample “anecdotal evidence that third-party advisors wield considerable influence,” and recent research commissioned by the American Council for Capital Formation found that ISS recommendations “are followed nearly 100% of the time by many of the largest fund managers in the country.”[4] But empirical research is still developing.[5] One major issue is disentangling causation from correlation. While most people agree that proxy advisors influence voting outcomes, their degree of influence is contested.[6] The proxy advisors’ own disclosure policies limit researchers’ ability to assess advisors impact, since neither ISS nor Glass Lewis disclose their historical recommendation data.[7] Despite these limitations, as corporate governance issues are addressed below, the proxy advisors’ positions are highlighted, along with any evidence or inferences about the effects of their recommendations.

Securities and Exchange Commission (“SEC”) regulatory policy has supported proxy advisors’ influence, whatever it may be. In 2003, the SEC promulgated Rule 206(4)-6 titled “Proxy Voting by Investment Advisers.”[8] The rule addressed investment advisers’ fiduciary duties to clients when voting client proxies and required, among other things, that investment advisers adopt written voting policies designed to ensure that the adviser votes in the best interests of clients.[9] The adopting release stated that advisers could comply with their duties by voting “in accordance with a pre-determined policy, based upon the recommendations of an independent third party.”[10] This guidance was soon followed by two no-action letters to ISS and Egan-Jones[11].[12] Egan-Jones requested a no-action letter clarifying whether its proxy advisory service could be considered “independent” despite its corporate governance consulting relationships with corporations.[13] Staff responded affirmatively, subject to investment advisers’ “ongoing duty to vet the proxy advisory firm’s relationship with each issuer.”[14] ISS followed up, asking for clarification, to which SEC staff responded that “an investment adviser may instead determine that a proxy voting firm is capable of making impartial recommendations … based on the firm’s conflict procedures.”[15] Over the next decade, concerns arose that investment advisers were “blindly casting” votes in line with proxy advisors’ recommendations.[16] In an effort to address this concern, the SEC issued Staff Legal Bulletin (“SLB”) No. 20 in 2014, emphasizing investment advisers’ oversight responsibilities.[17] However, SLB No. 20 did not fundamentally change the ability of investment advisers to rely on proxy advisors’ recommendations.[18] Amid continued concern about proxy advisors’ outsize influence, the SEC withdrew the no-action letters to ISS and Egan-Jones in late 2018.[19] Still, SLB No. 20 remains in effect, meaning investment advisers may still rely on proxy advisors’ voting guidelines.[20] As explained by the General Counsel of ISS, withdrawal of the letters “does not change the law, does not change the manner in which institutional investors are able to use proxy advisory firms, nor does it change the approach that institutions need to take in performing diligence on their proxy advisory firms.”[21]

Corporate Governance Practices

The following pages provide summaries of today’s most important governance topics. These topics can be categorized into three areas: board composition, board selection, and board committees. Overall, the trend, especially in board selection, has been towards greater shareholder empowerment.

Board composition looks at the size of boards, the rise of independent directors, the increase in separate chairperson and CEO roles, and the qualifications and characteristics of board members.

Board selection looks at the shift from staggered to unitary boards, from plurality to majority share voting, and at the fight for proxy access.

Finally, the board committee section looks more closely at two of the most important board committees – the audit and compensation committees. The audit committee oversees corporate financial reporting, and fulfilling its functions requires financial and accounting expertise. The compensation committee sets corporate pay policy and the work of compensation committees receives acute public scrutiny whenever executive pay enters popular consciousness, and recurrent review by shareholders in say-on-pay votes.

Each of these three categories of governance issues is addressed in more detail in the following pages.

Board Composition

Board Size

Boards can range in size from just a few people to over a dozen. There are several theories about the determinants of board size, including (1) the larger the scope of operations of a company the larger the board, (2) negotiation between company management and the board determines board size, (3) the amount of monitoring required determines board size, and (4) boards grow to an inefficient size and facilitate management’s consumption of private benefits.[22] Theories aside, optimal board size is contested. Widely publicized research from 2014 found that smaller boards “reap considerably greater rewards for their investors.”[23] However, larger boards may help when a company needs a variety of skills on the board[24] and they are associated with lower stock price volatility.[25]

Consistent with the theories of operational scope and monitoring, larger companies tend to have bigger boards. S&P 500 boards average 11 members, S&P MidCap 400 boards average 10 members, and S&P SmallCap 600 boards average 8.5 members.[26] Additionally, board size appears to have remained stable over time. In a sample of 81 U.S. publicly traded companies that survived from 1935 to 2000, Lehn et al., find that “[m]edian board size is 11 in 1935, peaks at 15 in 1960, and falls back to 11 in 2000,” and that the “standard deviation in board size falls steadily … from 5.5 in 1935 to 2.7 in 2000.”[27]

Growth of Independent Directors

Although board sizes remained stable, the composition of boards changed dramatically. One change is the rise of independent directors. To understand this change we first look at how independence is defined, the increasing prevalence of independent directors over time, and some factors contributing to their rise.

Independence can be defined in a variety of ways. While defintions of independence have evolved over time, the NYSE currently defines an independent director as one who the board “affirmatively determines” has no “material relationship” with the company “either directly or as a partner, shareholder or officer of an organization that has a relationship with the company.”[28] NASDAQ currently defines an independent director as someone who is not an executive officer or employee of the company and who, in the board’s opinion, has no relationship which would “interfere with the exercise of independent judgment,” in carrying out their director responsibilities.[29] The SEC currently defines independent directors for audit committee purposes as those who do not “[a]ccept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer or any subsidiary thereof,” except for payment for board membership, or are not an executive officer or beneficial owner, directly or indirectly, of more than 10% of any class of voting equity securities.[30]

Boards today are composed of far more independent directors than sat on boards in the past. Lehn et al., found that insider representation fell from 43% in 1935 to 13% in 2000.[31] In fact, the history of independent directors can be split into two time periods: before and after the 1970s. The average number of insiders on company boards increased from five in 1935, to six in the 1950s and 1960s, before falling to two in 2000.[32] The percentage of independent directors on company boards increased from about 20% in the 1950s and 1960s, to about 35% in the 1980s, before surpassing 50% in the 1990s and rising above 70% in the 2000s.[33] Today, 80% of directors at Russell 3000 companies are independent and 85% of directors at S&P 500 companies are independent.[34] Only 54 and 26 companies in the S&P 1500 had three, or four or more inside directors in 2017.[35]

There are several causes of the rise of independent directors: government regulation, listing exchange requirements, and market forces, and all trace back to the 1970s. Mid-20^th century boards were typically “ill-suited to scrutinize executives,” spending most of their time “talking about shooting, fishing, and women.”[36] This reality came to light publicly with two major events. First, the bankruptcy of Penn Central in 1970, the largest corporate bankruptcy in history up to that time, in which the directors were nothing more than a “rubber stamp.”[37] Second, the Watergate Special Prosecutor’s Office successfully prosecuted almost twenty companies in 1976 for violating campaign finance laws, finding that company managers and inside directors knew of the payments, but that outside directors had not been informed.[38] These scandals led to calls for regulation from the highest levels of government. The SEC held hearings on corporate governance in 1977, and legislation to mandate majority independent directors on corporate boards, and on audit and nominating committees, was proposed by Senators and Representatives in 1980, but not adopted.[39] Pressure exerted by the SEC’s hearings into corporate governance resulted in the NYSE changing “its listing requirements in 1977 to require each listed company’s board to have an audit committee composed of directors independent of management.”[40]  Simultaneously, the private sector moved toward self-regulation. Both the American Bar Association and the Business Roundtable “acknowledged in separate reports in 1976 and 1978 respectively that boards of public companies should typically have a majority of outside directors and should establish audit, compensation and nomination committees outside directors dominated.”[41]

Results from this flurry of activity were significant, the number of independent directors increased markedly from 1970 to 1985, but the watershed decades came in the 1990s and 2000s. The number of independent directors rose dramatically in the 1990s, and they became much more active monitors of corporate managers. The rise of independent directors in the 1990s seems to have been driven by two factors. First, influential private institutions continued to promulgate best practice advice, such as the American Law Institute’s 1992 Principles of Corporate Governance, which advised that public corporations “should have a majority of directors who are free of any significant relationship with the corporation’s senior executives.”[42] Second, shareholdings by large institutional investors rose significantly, “from under 30% to over 50%” of the stock market.[43] This meant that there was an increasingly powerful block of professional investors incentivized to advocate for better monitoring, as embodied in best practices, by boards. Economic analysis of boards’ more active monitoring in the 1990s as compared to previous decades pointed to increased incentive-based compensation for directors, which grew “from 25% [of total pay] in 1992 to 39% in 1995,” and still higher in 1997.[44] Business media documented the effects of board activism, such as the rapid replacement of CEOs by boards in the 1990s,[45] including at 61 at the 200 largest U.S. public corporations in a 22 month period.[46]

The landscape and drivers of director independence changed significantly following multiple rounds of corporate governance reform in 2002 and 2010. Under Sarbanes-Oxley (SOX) § 301, passed in 2002, and Exchange Act Rule 10A-3(b)(1) promulgated thereunder, every company must have an audit committee, that committee must have at least three members, and all of them must be independent.[47] Listing exchange rules also began to require more independent directors. Soon after SOX was enacted, both the NYSE and NASDAQ adopted rules requiring almost every listed company to have a majority-independent board within 12 months of listing.[48] In addition, both the compensation and nominating committees for companies on either exchange must be dominated[49] by independent directors, rules first put in place at the NYSE in 2003.[50] After the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, NASDAQ also promulgated compensation committee independence rules, and the NYSE updated their rules in light of the financial crisis and the new regulatory mandate.[51]

Less certain than the influence of regulation, listing requirements, adherence to best practices, and economic incentives on the rise of independent directors, is the influence of proxy advisory firms. ISS currently advises a vote against or withheld from any proxy with less than 50% independent directors,[52] while Glass Lewis prefers at least 67% independent directors.[53] As with many other governance measures, it is difficult to identify any systemic influence of the proxy advisory firms. Professor Jeffrey Gordon wrote a 105-page law review article with a “nonexhaustive survey of the mechanisms of director independence,” but does not mention proxy advisory firms.[54] Additionally, corporations have a much higher percentage of independent directors than either ISS or Glass Lewis recommend, so it is likely that direct shareholder or regulatory demands have been more influential than the proxy advisors.

Separate Chairperson/CEO

Another change in board structure is a separation of the roles of chairperson and CEO. “The campaign to separate the positions is rooted in the notion a stand-alone chairman can act as a counterweight to a stand-alone chief executive.”[55]

American public companies have increasingly separated the chairperson and CEO roles, aligning themselves more closely with their European counterparts. 71% of S&P 500 companies had a dual chair/CEO in 2005, and the percentage steadily declined to 52% in 2015.[56] Today, 51% of the S&P 500 are governed by separate chairpersons, and 61% and 62% of the S&P 1500 and Russell 3000 are governed by separate chairpersons.[57] This compares with 90% separation among the Stoxx Europe 600,[58] and 95% of the UK’s FTSE 100.[59]

The move to separate chairpersons and CEOs is supported by proxy advisory firms.[60] However, the propriety of separating the roles is contested. In the 10 years between 2005 and 2015 there were 511 shareholder proposals to separate the chair and CEO roles, but only 6% of those proposals passed.[61] “There is little research support for requiring a separation of these roles,” with most research finding that the independent “status of the chairman is not a material indicator of firm performance or governance quality.”[62] This has led to calls for caution, exhorting companies to focus on their goals when separating the chairperson and CEO roles rather than blindly following ‘best practices.’[63] In fact, “[m]ost separations occur during the succession process,” from one CEO to another, with the outgoing CEO staying on as chairman of the board.[64] Larcker and Tayan found that nearly 80% of all changes from a unified CEO/chair to separate roles took place during executive successions, with larger companies more likely to separate the roles temporarily and smaller companies more likely to separate the roles permanently.[65] These findings suggest that companies’ management and boards are themselves the catalyst for the increased incidence of separate chair and CEO roles, because they find that separation facilitates effective leadership in certain situations, most notably succession.[66]

Board-member Qualifications and Characteristics

The final topic addressed in this section is board member qualifications. Board members are tasked with setting company policy and overseeing management, and must bring some level of relevant experience and knowledge to do a serviceable job.

Obtaining data on director qualifications was largely fruitless, but the available data was not surprising. Heidrick & Struggles, Inc. (1981), reported that 65% of board members were business executives, 6% attorneys, 9% educators or education administrators, and 5% consultants.[67] Kesner (1988), corroborated those findings.[68] Diving into the breakdown of committee membership, Kesner reported that members of the ‘important’ nominating, compensation, audit, and executive committees were more likely to have business experience than general board members.[69] Investigating along the same line, Bilimoria and Piderit reported, using 1983 data, that members of the audit and compensation committees were more likely to be older and sit on more boards than the average board member.[70]

It is unlikely that board members’ substantive experience has changed much from the 1980s to today, since other measures of board composition have also remained stable. Average age has increased from 59 in 1983 to 63 today.[71] Average tenure remains between 8 and 10 years.[72] If anything, it is likely that the preference for business experience in board members has ticked up. Hillman et al., reported in 2002, relying on 1992 data, “that 81% of large firm directors were chief executives, chief operating officers, or retired executive officers of other large corporations.”[73] More recent Heidrick & Struggles data provides a more granular breakdown of directors’ experience. From 2011 to 2013, 11% of new board appointees had government or military backgrounds.[74] About two-thirds of all new appointees from 2009-2013 were current or former CEO or CFOs.[75] A similar percentage of new board appointees from 2011-2013 had previous board experience.[76] As far as industry experience, in 2014 and 2015, about 25% of new outside directors came from careers in financial services, 22% in industrials, and 19% in consumer products.[77] Even if the data on new non-executive directors showed major changes from older information, shifts in overall boardroom composition would still be slow. Average annual board turnover is about 6%,[78] which means it takes about 16 years to replace the entire director population.

Non-professional board diversity has shifted more notably and, for gender diversity, been documented more extensively. The largest change in board composition is in gender diversity. In 1986, women held only about 4% of corporate directorships,[79] up to just 7% by 1997,[80] and increasing to 25% of directorships in the S&P 500 and 18% in the Russell 3000 today.[81] Racial diversity has also increased. African-American directors made up only about 2% of Fortune 1000 boards throughout the 1990s,[82] while from 2009 to 2016 between 5-10% of new board appointees were African-American.[83] During the same seven-year time period, the number of new Hispanic appointees has hovered around 5%, and the percentage of new Asian appointees has fluctuated from 4-8%, of total new board appointees.[84]

Proxy advisors have few voting guidelines that directly impact director qualifications. Still, Glass Lewis is wary of supporting male board nominees when a board has no female members, and exhorts companies to provide “sufficient rationale for [current members’] continued board service.”[85] ISS’ Social Advisory Services group will recommend “against nominating committees where the board lacks at least one female director and one racially diverse director, and it is not at least 30% diverse.”[86] Overall, it is difficult to pinpoint proxy advisors’ impact on board member qualifications absent more data showing a change in board members’ substantive experience. Moreover, Glass Lewis’ guidelines on board diversity do not suggest that they had a major impact on changing female director representation from almost nothing to the 20-25% we see today.

In the past few years, institutional shareholders have begun clamoring more loudly for gender-diverse boards. Both State Street and BlackRock, noting that 25% of the Russell 3000 had no women on their board, issued new guidance in March 2017 that emphasized the positive correlation between board diversity and financial performance, and threatened to vote against boards that do not act to increase gender diversity.[87] State Street dubbed its new guidance the “Fearless Girl” campaign, and claims that it has directly influenced over 300 companies to add a female director in response to its demands.[88] State Street is set to increase pressure on companies in 2021, if it follows through on plans to update its proxy voting guidelines to vote against “the entire [nominating committee] slate” of any company that does not meet its gender diversity criteria.[89] BlackRock’s 2019 guidelines set out an expectation of “two women directors on every board.”[90] Vanguard, highlighting its membership in The 30% Club, which advocates for gender diversity on boards, called board diversity “an economic imperative, not an ideological choice.”[91] Major pension funds have also joined in the push. California’s Public Employees Retirement System asks companies to disclose their diversity policy.[92] The Massachusetts Pension Reserves Investment Management Board will vote against or withhold votes from all board nominees if less than 30% are diverse.[93] And the New York State Common Retirement Fund announced in March 2018 that they would vote against all directors standing for re-election on all-male boards.[94]

Board Member Selection

From Staggered to Unitary Boards

A ‘staggered’ or ‘classified’ board is one where director seats come up for shareholder vote on a rotating basis. Typically, “one-third of the directors are elected each year to three-year terms.”[95] Companies without a staggered board have a “unitary” board, where all director seats are up for election each year. Advocates for staggered boards highlight the benefits of leadership continuity and strategic stability.[96] Detractors claim that staggered boards entrench ineffective management. Companies with staggered boards are much more difficult for a hostile bidder to buy[97] because it takes at least two election cycles for discontented shareholders to affect leadership change, as opposed to just one election cycle for a non-staggered board. Empirical evidence generally weighs in favor of unitary boards. “Much of the empirical research over the past decade” supports the view that there is a “negative association between staggered boards and firm value.”[98] However, researchers are still working to resolve the shortcomings in studies so far, which are (1) a lack of causal, rather than correlative, evidence,[99] and (2) specific instances where staggered boards may be helpful to a particular company, even though they are harmful on average.[100]

Staggered boards have historically been a common institutional arrangement in American corporations. According to a database of nearly 2,500 firms, made up of the S&P 1500 and another 1,000 firms “selected primarily on the basis of market capitalization and high institutional ownership levels,” curated by the Investor Responsibility Research Center: in 1993, 53% of corporations had staggered boards, and in 1998, 58% of corporations had staggered boards.[101] Additionally, corporations entered the public securities market (IPO) with staggered boards at increasingly high rates: 34% of IPOs were for companies with staggered boards in 1991-92, 44% between 1994 and 1997, 66% in 1998, 82% in 1999, and 73% of IPOs in 2001 were for companies with staggered boards.[102]

Since the 1990s there has been a divergence between the governance in the established public equity market, where staggered boards have been on the decline, and at IPO issuers, which tend to retain staggered boards. According to Ernst & Young, only 12% of the S&P 500 now have staggered boards.[103] This represents a steep decline from 60% staggered boards governing the S&P 500 in 2002, to 55% in 2005, 40% in 2007, 18% in 2012, to 12% today.[104] Staggered boards are more popular among smaller companies, 30% in the S&P 1500 and 40% in the Russell 3000, but still less so today than they were in the 1990s.[105] In contrast, surveys of companies that went public since 2010 find that nearly 80% had staggered boards.[106]

Shareholders have lined up in opposition to staggered boards.[107] BlackRock, Fidelity, Vanguard, TIAA-CREF, and CalPERS all oppose staggered boards.[108] Both Glass Lewis and ISS support unitary boards.[109] Comprehensive analysis of the steep decline in staggered boards points to shareholder empowerment ushered in by SOX in 2002, and “a remarkable increase in activism by hedge funds,” in the 2000s. Overall, “60 percent of the companies that decided to de-stagger their boards [between 2003 and 2010] … have done so in response to some form of shareholder pressure.”[110] Even companies that did not face direct shareholder pressure were “driven by a sense that [a unitary board structure is] preferred by shareholders.”[111] Some credit for the change from classified to unitary boards among the S&P 500 can be attributed to the Shareholder Rights Project (“SRP”), a Harvard Law School (“HLS”) clinic headed by Lucian Bebchuk, an HLS professor who provided some of the foremost empirical research on staggered versus unitary boards. In operation from 2012 to 2014, the SRP submitted de-staggering proposals at 129 companies, of which 121 were adopted.[112] Those companies represented “about two-thirds of the S&P 500 companies that had classified boards as of the beginning of 2012.”[113]

From Plurality to Majority Voting

The two dominant shareholder voting systems in American corporate governance are plurality and majority voting. Shareholder votes in either system can be cast for or against a proposal, or withheld. Under plurality voting, a director is elected if they receive more votes than another nominee. Therefore, in an uncontested election, a director can be elected with the backing of a single share. For example, in a corporation with 1,000 voting shares, a lone nominee can win an election by receiving 1 affirmative vote if the other 999 votes are withheld.[114] Under majority voting, a director is elected only if they receive majority support from the votes cast. The same lone nominee needs at least 501 affirmative votes if 1,000 votes are cast.[115] However, even under the strict majority system just described, the failure of an incumbent nominee to be elected “does not automatically mean that the nominee will be removed from the board,” because, at least for Delaware corporations, “an incumbent director continues as a holdover director until the director resigns, the director is removed, or a successor is elected.”[116] Moreover, a new nominee who fails to receive majority support might also get appointed to the board because most state statutes provide that “the board of directors has the authority to fill vacancies on the board” as a default, and “nothing prevents the board from appointing the very person who failed to receive a majority of ‘for’ votes to fill the vacancy.”[117] Still, the consequence of majority voting is more powerful shareholders. Dissidents can impact an uncontested election by withholding votes in a majority model, in contrast with plurality voting, where a dissident must put up and promote an alternative candidate in order to directly influence the board of directors.[118]

Much like the shift from staggered to unitary boards, voting systems changed rapidly and substantially in the past couple decades. In 2005, more than 90% of S&P 500 companies employed plurality voting.[119] Over 60% of the S&P 500 had shifted to majority voting by 2008,[120] with an 80% adoption rate by 2011.[121]  Kahan and Rock attribute majority voting’s “meteoric” rise to a simple explanation: “boards just caved” to shareholder pressure.[122] The Carpenter Pension Funds submitted the first shareholder proposals for majority voting in the 2004 proxy season and,[123] after 2006 amendments to the Delaware General Corporation Law (DGCL) that permitted “shareholders to adopt a bylaw, not subject to further amendment or repeal by the board, proscribing the voting standard for director elections,” activists finally had “a clear path to majority voting.”[124]

Shareholder pressure had been building for more voice in corporate elections for about 15 years prior to 2006. Professor Grundfest of Stanford Law School, wrote a 1993 article outlining the benefits of shareholder “just vote no” campaigns, where “shareholders can express their lack of confidence in management’s performance by marking their proxy cards to withhold authority for the reelection of these corporate boards.”[125] He noted a major shortcoming of just voting no: the vote was “purely symbolic” because “boards are generally elected by pluralities.”[126] Despite its pure symbolism at that time, the strategy had already been employed by “the College Retirement Equities Fund, with $47.2 billion of equity assets under management, [CalPERS], the nation’s largest public employee pension fund, with $68.6 billion of assets, and the New York State Common Retirement Fund, with $56 billion of assets.”[127] Institutional shareholders continued to employ “just vote no” strategies up until the shift to majority voting,[128] with seven 2004 withhold campaigns achieving greater than 50% shareholder participation,[129] and highlighted by CalPERS withhold campaign at Disney that same year.[130]

Institutional shareholders received formal support for enhancing the power of their “just vote no” efforts immediately prior to the DGCL amendments. ISS released a white paper in 2005 outlining their belief “that the benefits of majority voting outweigh the potential concerns,” and promising to “support non-binding shareholder proposals calling for majority voting.”[131] The Council of Institutional Investors followed ISS’ lead later in 2005, sending letters to the largest 1,500 U.S. public companies requesting that they voluntarily switch to majority voting.[132] No empirical work has tried separating the influence of proxy advisors from the broader move towards majority voting. While several papers exploring the power of proxy advisors mention the fact that majority voting increases proxy advisors’ influence on director elections, none assesses proxy advisors’ influence in obtaining majority voting systems in the first place.[133] Any empirical assessment of proxy advisory firms’ influence will struggle to disentangle those firms’ support for majority voting from many investors’ predisposition to support majority voting.

Despite the epochal shift from plurality to majority voting at the largest public companies, “[m]ost US companies still elect directors by a plurality vote standard.”[134] The persistence of plurality voting is supported, in part, by proxy advisors’ non-punitive stance towards plurality voting. For example, Glass Lewis’ 2019 guidelines provide that they “generally support proposals calling for the election of directors by a majority vote,” but the firm does not recommend that clients withhold votes from or vote against directors at companies with plurality systems in place.[135]

At companies that now employ majority voting, the “shift to majority voting makes the shift from staggered boards all the more important.”[136] Staggered boards are no longer just an effective takeover defense; they also “insulate board members from shareholder ‘withhold’ campaigns.”[137] Directors on a board subject to a withhold campaign who are not up for election can engage in dialogue with the dissatisfied shareholders, change their stance on certain corporate policies, or remain committed to their preferred corporate policy in the hope that time proves the prudence of their position. A board staggered in the traditional way,[138] ensures that at least 2/3 of directors have at least one year notice of shareholder dissatisfaction, and they can moderate or change their stance without being personally exposed to a devastating shareholder vote of no confidence.

Underneath the apparent colossal importance of majority voting is a rather hollow base of empirical support. As of 2016, “[f]ew studies” had examined the effect of majority voting on firm performance, and their results varied.[139] Sjostrom and Kim “found no statistically significant market reactions” to firms’ adoptions of majority voting.[140] Cai et al., found abnormal positive returns in the first year after adoption, but concluded that “adoption of majority voting has little effect on director votes, director turnover, or improvement of firm performance.”[141] Ertimur et al., in contrast, did find that companies that adopted majority voting systems experienced abnormal positive stock price return.[142] Clearly, more research is necessary.

The Fight for Proxy Access

Proxy access refers to shareholders’ ability to put their preferred director nominees on the corporation’s proxy card. Without proxy access, dissident shareholders must promote their own nominees through a separate proxy card, with attendant costs estimated to average about $6 million,[143] and sometimes climbing significantly higher.[144] Costs accrue from the need to “file Schedule 14A with the SEC, hire a proxy solicitor, and often engage in an expensive public campaign” of support for their nominee(s).[145] Proxy access reduces shareholder costs to promote their preferred leadership, since promotion and mailing costs are covered by the corporation. Corporations that give access to significant shareholders sometimes offer shareholders the choice of more board candidates than there are seats available – a “first” in corporate governance.[146]

The fight for proxy access has a long history. SEC staff first considered proxy access in 1942 at the request of the Commission.[147] No rules were adopted at that time.[148] 35 years later, in 1977, the SEC again considered proxy access with no final rule promulgated as a result, as part of broader reform to proxy rules.[149] In 1992, the Commission noted “the difficulty experienced by shareholders in gaining a voice in determining the composition of the board of directors,” but declined to make such “a substantial change” to proxy rules as to mandate proxy access.[150] Proxy access has been considered more frequently by the SEC in the past couple decades.[151] Most recently, the SEC promulgated final rule 14a-11 on August 25, 2010, mandating proxy access for shareholders who held more than 3% of a corporation for at least 3 years.[152] Although that rule was vacated by the D.C. Circuit,[153] amendment to SEC rule 14a-8(i)(8), which was adopted at the same time, is still in force and is written to require companies to “include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company’s governing documents for the inclusion of one or more shareholder director nominees in a company’s proxy materials.”[154]

Since 2010, proxy access has proliferated at major companies as shareholders propose bylaw amendments on a company-by-company basis. 2015 “was a break-through year for shareholder” proxy access proposals, with 87 proposals made at Russell 3000 companies, compared to a “total of 12, 13, and 17 proxy access shareholder proposals” in 2012, 2013, and 2014.[155] At least 48 of those 2015 proposals were successful,[156] and 118 companies adopted proxy access bylaws in 2015 by year-end.[157] 78 proposals were submitted in 2016 and 41 were adopted,[158] with 224 companies adopting proxy access bylaws in 2016 by year-end.[159] Adoption has since tapered off,[160] as have proposals. In 2017 shareholders at Russell 3000 companies voted on 49 proxy access proposals, and in 2018 there were only 38 such votes.[161] As of January 31, 66% of the S&P 500, 30% of the S&P 1500, 16% of the Russell 3000, and 5% of the S&P SmallCap 600 allow some form of proxy access.[162]

In that breakthrough 2015 year, both ISS and Glass Lewis overwhelmingly supported shareholder proxy access proposals. ISS changed its voting policy guidelines for the first time from considering proxy access proposals on a case-by-case basis to supporting them without further review as long as they contained certain features that had been present in the SEC’s vacated rule 14a-11.[163] Throughout the year, ISS recommended voting for all of the 83 shareholder proxy access proposals at Russell 3000 companies.[164] While Glass Lewis retained a case-by-case approach to proxy access proposals,[165] it also “generally recommends ‘For’ proxy access shareholder proposals.”[166] It is possible that proxy advisors have had a material impact on the success or failure of proxy access proposals. The proposals are contested, as evidenced by their spotty adoption, meaning that a proxy advisor recommendation with a 10% voting impact could be important. Moreover, institutional shareholders did not, as of 2015, have uniform positions on whether to support proxy access proposals. BlackRock, State Street, and Vanguard all assessed proxy access proposals on a case-by-case basis, with only Vanguard providing specific guidance on a proxy access structure they would likely support.[167] Meanwhile, Fidelity was generally opposed to proxy access.[168] Therefore, of all the governance issues, proxy access is one of the most likely in which proxy advisory firms have had a major impact.

Select Board Committees

Financial Oversight – Audit Committees

A board’s audit committee is a specialized group of board members who focus on financial oversight. As such, the history of audit committees is intimately tied with the accounting profession. Any company listed on the NYSE must adopt an audit committee charter that includes oversight of (1) the company’s financial statements, (2) compliance with legal and regulatory requirements, (3) independent auditor qualifications, and (4) performance of the independent auditor and the internal audit function.[169] NASDAQ has similar charter requirements.[170] The SEC requires that all public companies disclose whether they have a charter, and its contents, in their annual proxy.[171] To ensure the audit committee can effectively carry out its function, the SEC requires that the committee include at least one financial expert,[172] NYSE requires all members be “financially literate,”[173] and NASDAQ requires at least one member to be “financially sophisticated.”[174], [175]

Much like proxy access, the idea of audit committees percolated for decades before more recent, widespread, implementation. The SEC first endorsed the concept of the audit committee in 1940, after its famous investigation of the financial fraud at McKesson & Robbins.[176] The American Institute of Certified Public Accountants (AICPA) issued a policy statement in 1967 encouraging audit committees at public companies.[177] The AICPA promoted audit committees as a mechanism to improve corporate financial reporting through the committees’ review of internal controls, nomination of independent auditors, and by focusing specifically on financial policy and operational oversight.[178] The Foreign Corrupt Practices Act, enacted in 1977, bolstered the logic of establishing an audit committee through its requirement that internal accounting controls detect illegal payments and report them to the board.[179] The NYSE therefore, in 1978 after some prodding from the SEC, “required all listed firms to have an [independent] audit committee.”[180] NASDAQ followed suit a decade later, following the 1985 report from the National Commission on Fraudulent Financial Reporting recommending completely independent audit committees at all public companies, when the National Association of Securities Dealers required audit committees at all NASDAQ listed companies.[181] This decades-long development was finally formalized legally in SOX, enacted in 2002 after the accounting scandals at WorldCom and Enron. SOX required, for the first time under federal law, that all public companies establish an audit committee of completely independent directors.[182]

Compensation – Compensation Committees and Say on Pay

Executive compensation is governed by a comprehensive set of rules focused on mandatory disclosures, the composition of the compensation committee, and shareholder input about executive pay plans. This section focuses on the latter two areas.

The work of developing an executive pay plan is delegated to a board’s compensation committees, which is a specialized group of directors who focus on executive remuneration.

Both the NYSE and NASDAQ have listing rules governing the establishment and composition of compensation committees,[183] starting with the requirement that every listed company have a compensation committee.[184] Committees at companies listed on either exchange generally must be composed entirely of independent directors, and NASDAQ rules require that the committee have at least two directors and that a majority of the committee’s directors be independent.[185] The NYSE requires the compensation committee to (1) review and approve of the CEO’s compensation, (2) evaluate  the CEO’s performance, and (3) determine that the CEO’s pay was based on their performance.[186] The compensation committee must also recommend remuneration to the board for non-CEO executives, including the President, CFO, controller or principal accounting officer, any vice president of a principal business unit, and any other person in a policy-making role.[187] NASDAQ does not include similar rules as those just discussed, but it does prohibit the CEO from attending compensation committee meetings when the topic is the CEO’s pay.[188] Both the NYSE and NASDAQ rules allow compensation committees to retain consultants to help advise them in their substantive deliberations.[189]

A recent component of executive pay governance is shareholder (non-binding) approval of executive pay, or “say-on-pay.” Say-on-pay first became mandatory in 2011 after the SEC promulgated rule 14a-21 in response to § 951 of the Dodd-Frank,[190] but shareholders had agitated for a say-on-pay prior to the SEC’s rule. For example, shareholders submitted 51 say-on-pay proposals in the 2007 proxy season, receiving an average of 43% support.[191]

Say-on-pay requirements are fairly straightforward. Companies must submit (1) named executive officer (“NEO”) compensation to a vote at least once every three years,[192] (2) the question of whether a say-on-pay vote should be held annually, biennially, or triennially at least once every six years, and (3) in any shareholder solicitation to approve a merger or other major transaction, any NEO ‘golden parachute’ arrangements.[193] In practice, most companies hold annual say-on-pay votes. A 2016 survey found that 82% of the Russell 3000 held annual say-on-pay votes while 17% held triennial votes, leaving just 1% with biennial votes.[194]

Although shareholder votes are non-binding, they are often claimed to serve “as an important barometer” for companies.[195] And, as with other items of corporate governance, proxy advisors’ positions correlate strongly with the support of any given proposal. In 2016, “[a]verage [say-on-pay] support at companies with a favorable ISS recommendation was 94%, while average support at companies with a negative recommendation from ISS was 66%.”[196] When issuers receive low shareholder support in say-on-pay votes, ISS and Glass Lewis may recommend voting against incumbent directors in the next election. If a proposal receives less than 70% support, ISS conducts “a qualitative review of the compensation committee’s responsiveness to shareholder opposition at the next annual meeting.”[197] Inadequate responsiveness generally results in a recommendation against incumbent compensation committee members, while “multiple years of insufficient responsiveness” may lead to a recommendation against the full board.[198] Glass Lewis has a similar policy, triggered when a proposal receives less than 80% support.[199] However, the impact of say-on-pay votes on company behavior is modest and contested. Of 68 Russell 3000 companies that did not receive shareholder say-on-pay support in 2013, 44 subsequently modified their compensation policies and only 18 actually reduced CEO or NEO pay.[200] Fisch et al., note that there is no “conclusive evidence that issuers reduce executive pay packages in response to lower approval rates,” but rather, when issuers do respond to low say-on-pay votes, they tend to modify the structure of executive pay, focusing more on restricted stock and options.[201]

---

[1] A longer, separate memo is being prepared on the role of proxy advisors, their regulation, and policy concerns that have been raised about them.

[2] Brian Croce, Washington down on proxy advisors, Pensions & Investments (Nov. 26, 2018), https://www.pionline.com/article/20181126/PRINT/181129938/washington-down-on-proxy-advisers.

[3] David F. Larcker et al., The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry, Harvard Law School Forum on Corporate Governance and Financial Regulation (June 14, 2018), https://corpgov.law.harvard.edu/2018/06/14/the-big-thumb-on-the-scale-an-overview-of-the-proxy-advisory-industry/.

[4] Frank M. Placenti, Are Proxy Advisors Really a Problem?, Harvard Law School Forum on Corporate Governance and Financial Regulation (Nov. 7, 2018), https://corpgov.law.harvard.edu/2018/11/07/are-proxy-advisors-really-a-problem/.

[5] Cindy R. Alexander et al., The Role of Advisory Services in Proxy Voting (Nat’l Bureau of Econ. Research, Working Paper Vo. 15143, 2008), available at http://www.nber.org/paper/w15143.

[6] See Larcker et al., supra note 3.

[7] Id.

[8] 17 C.F.R. § 275 (2003).

[9] Fatima S. Sulaiman and Mary Clarke-Pearson, SEC Staff Issues Guidance on Investment Adviser Proxy Voting Responsibilities and Use of Proxy Advisory Firms, K&L Gates (July 10, 2014), http://www.klgates.com/sec-staff-issues-guidance-on-investment-adviser-proxy-voting-responsibilities-and-use-of-proxy-advisory-firms-07-10-2014/.

[10] Proxy Voting by Investment Advisers, Exchange Act Release No. IA-2106, 68 Fed. Reg. 6585-01 (Feb. 7, 2003) (Final Rule).

[11] Another proxy advisory firm.

[12] See Institutional Shareholder Services, Inc., SEC No Action Letter, 2004 WL 2093360 (Sept. 15, 2004); Egan-Jones Proxy Services, SEC No Action Letter, 2004 WL 1201240 (May 27, 2004).

[13] SEC Signals Changing Views on Regulation of Proxy Advisory Firms, Brownstein Hyatt Farber Schreck (Feb. 18, 2018), available at https://www.bhfs.com/Templates/media/files/SEC%20Signals%20Changing%20Views%20on%20Regulation%20of%20Proxy%20Advisory%20Firms.pdf.

[14] Id.

[15] Institutional Shareholder Services, Inc., SEC No Action Letter, 2004 WL 2093360 (Sept. 15, 2004).

[16] Daniel M. Gallagher, Commissioner, SEC, Remarks at Georgetown University’s Center for Financial Markets and Policy Event (Oct. 30, 2013).

[17] Sulaiman and Clarke-Pearson, supra note 9 (including “assessing the adequacy and quality of the proxy advisory firm’s staffing and personnel; and assessing whether the proxy advisory firm has robust policies and procedures that enable it to make proxy voting recommendations based on current and accurate information and to identify and address conflicts of interest relating to its voting recommendations”).

[18] See Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms, SLB No. 20 (June 30, 2014), https://www.sec.gov/interps/legal/cfslb20.htm; Jay Clayton, Chairman, SEC, Statement Announcing SEC Staff Roundtable on the Proxy Process at fn. 7 (July 30, 2018), https://www.sec.gov/news/public-statement/statement-announcing-sec-staff-roundtable-proxy-process.

[19] Statement Regarding Staff Proxy Advisory Letters, Div. of Inv. Mgmt, SEC (Sept. 13, 2018) (stating that the staff withdrew the letters “in order to facilitate the discussion at the Roundtable,” about “whether prior staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms should be modified, rescinded or supplemented.”); Ahead of Roundtable, SEC Makes Moves to Rein in Proxy Advisors, Main St. Investors Coalition (Sept. 13, 2018), https://mainstreetinvestors.org/ahead-of-roundtable-sec-makes-moves-to-rein-in-proxy-advisors/; Ning Chiu, In Advance of Roundtable, SEC Withdraws Letters on Investment Advisers’ Reliance on Proxy Advisory Firms for Voting Recommendations, Davis Polk (Sept. 13, 2018), https://www.briefinggovernance.com/2018/09/in-advance-of-roundtable-sec-withdraws-letters-on-investment-advisers-reliance-on-proxy-advisory-firms-for-voting-recommendations/.

[20] Steve Wolosky et al., SEC No-Action Letters on Investment Adviser Responsibilities in Voting Client Proxies and Use of Proxy Voting Firms, Harvard Law School Forum on Corporate Governance and Financial Regulation (Sept. 18, 2018).

[21] Id.

[22] Audra L. Boone et al., The Determinants of Corporate Board Size and Composition: An Empirical Analysis (Aug. 20, 2004) (finding evidence supporting scope of operations, negotiations, and monitoring), available at http://leeds-faculty.colorado.edu/Bhagat/IPO-Board.pdf.

[23] Joann S. Lublin, Smaller Boards Get Bigger Returns, Wall St. J. (Aug. 26, 2014), https://www.wsj.com/articles/smaller-boards-get-bigger-returns-1409078628; see also David Yermack, Higher market valuation of companies with a small board of directors, 40 J. of Fin. Economics 185 (1996); Theodore Eisenberg et al., Larger board size and decreasing firm value in small firms, 48 J. of Fin. Economics 35 (1998).

[24] Jeffrey A. Sonnenfeld, What Makes Great Boards Great, Harvard Business Review (Sept. 2002); Jeffrey L. Coles, Boards: Does one size fit all?, 87 J. of Fin. Economics 329 (2008).

[25] Shijun Cheng, Board size and the variability of corporate performance, 87(1) J. of Fin. Economics 157 (Jan. 2008).

[26] EY Center for Board Matters, EY (Jan. 31, 2019), https://www.ey.com/us/en/issues/governance-and-reporting/ey-corporate-governance-by-the-numbers#boardelections.

[27] Kenneth Lehn et al., Determinants of the Size and Structure of Corporate Boards: 1935-2000, 2 (Sept. 2004), available at https://faculty.fuqua.duke.edu/corpfinance/papers/2004.LehnPatroZhao.pdf.

[28] NYSE Listed Company Manual § 303A.02(a).

[29] Nasdaq Listing Rule 5605(a)(2).

[30] 17 CFR § 240.10A-3(b)(1)(ii); Id. § 240.10A-3(e)(1)(ii).

[31] Lehn et al., supra note 27, at 749.

[32] Id. at 757.

[33] Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices, 59 Stan. L.R. 1465, 1474 (Apr. 2007).

[34] EY Center for Board Matters, supra note 26.

[35] Kosmas Papdopoulos et al., U.S. Board Study: Board Accountability Practices Review, ISS 11 (Apr. 17, 2018), available at https://www.issgovernance.com/file/publications/board-accountability-practices-review-2018.pdf.

[36] Brian R. Cheffins, Corporate Governance Since the Managerial Capitalism Era 6 (July 2015 draft), forthcoming Bus. History Rev., https://poseidon01.ssrn.com/delivery.php?ID=833004024029080110102072119114118030102056089014095061075097084117074090111087014028028097023029026127033125079026015030118018042042033065023025068098095017087066074037076005031001092012092114024075024085001004103093098027096004025007125103074007081110&EXT=pdf.

[37] Id.

[38] Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance 537 (Boston, 1982).

[39] Cheffins, supra note 36, at 16–17.

[40] Id. at 16.

[41] Id. at 17.

[42] Gordon, supra note 33, at 1481.

[43] Bengt Holmstrom and Steven N. Kaplan, Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s, NBER Working Paper No. 8220 at 18 (Apr. 2001), https://www.nber.org/papers/w8220.pdf.

[44] Id.

[45] Joann S. Lubin and Matt Murray, CEOs Depart Faster than Even as Boards, Investors Lose Patience, Wall St. J. (Oct. 27, 2000); Thank you and goodbye, Economist (Oct. 28, 1999), https://www.economist.com/business/1999/10/28/thank-you-and-goodbye.

[46] Ronald J. Gilson, Unocal Fifteen Years Later, 26 Delaware J. of Corp. Law 491, 513 (2001).

[47] Requirements for Public Company Boards – Including IPO Transition Rules, Weil, Gotchsal & Manges LLP 6 (Mar. 2015), https://www.weil.com/~/media/files/pdfs/150154_pcag_board_requirements_chart_2015_v21.pdf.

[48] NASD and NYSE Rulemaking: Relating to Corporate Governance (Nov. 3, 2003), https://www.sec.gov/rules/sro/34-48745.htm; IPO Insights: Assembling Your Public Company Board of Directors, Orrick (excluding “controlled companies,” where more than 50% of the voting power is held by an individual, group, or other company), https://www.orrick.com/Insights/2018/06/Assembling-Your-Public-Company-Board-of-Directors.

[49] Either entirely or majority independent directors.

[50] Id. at 3; NASD and NYSE Rulemaking: Relating to Corporate Governance (Nov. 3, 2003), https://www.sec.gov/rules/sro/34-48745.htm; also Considering Director Independence, Covington & Burling LLP (July 12, 2007), https://www.cov.com/~/media/files/corporate/publications/2007/07/823.pdf.

[51] Keeping Current: SEC Approves NYSE and Nasdaq Independence Standards for Compensation Committees and Advisers, ABA (June 29, 2017), https://www.americanbar.org/groups/business_law/publications/blt/2013/02/keeping_current/; SEC Adopts Independence Rules for Compensation Committees and Their Advisers, Pillsbury (June 28, 2012), available at https://www.pillsburylaw.com/images/content/2/5/v2/257/CSCSTechECBAlert06282012.pdf.

[52] United States Proxy Voting Guidelines, ISS 9 (Dec. 6, 2018).

[53] Proxy Paper Guidelines, Glass Lewis 7 (2019).

[54] Gordon, supra note 33.

[55] Mengqi Sun, More U.S. Companies Separating Chief Executive and Chairman Roles, Wall St. J. (Jan. 23, 2019), https://www.wsj.com/articles/more-u-s-companies-separating-chief-executive-and-chairman-roles-11548288502.

[56] David F. Larcker & Brian Tayan, Chairman and CEO – The Controversy Over Board Leadership Structure 5 (June 24, 2016), http://ssrn.com/abstract=2800244.

[57] EY Center for Board Matters, supra note 26.

[58] Sun, supra note 55.

[59] Robert C. Pozen, Before You Split That CEO/Chair…, Harvard Business Review (Apr. 2006), https://hbr.org/2006/04/before-you-split-that-ceochair.

[60] United States Proxy Voting Guidelines, ISS 19–20 (Dec. 6, 2018); Proxy Paper Guidelines, Glass Lewis 8 (2019).

[61] John Laide, Issue Focus: Separate Chairman and CEO, SharkRepellent (Sept. 18, 2015), https://www.sharkrepellent.net/pub/rs_20150918.html; Joseph Kieffer, Separation of CEO-Chair Roles Rejected by Shareholders, Equilar (July 6, 2018), https://www.equilar.com/blogs/388-separation-of-ceo-chair-roles-rejected-by-shareholders.html.

[62] Larcker and Tayan, supra 56, at 1; see also Ryan Krause et al., CEO Duality: A Review and Research Agenda, 40(1) J. of Mgmt 256 (Jan. 2014).

[63] Pozen, supra note 59.

[64] Larcker and Tayan, supra 56, at 1.

[65] Id.

[66] See Separating the Roles of CEO and Chairman, Oliver Wyman 7–8 (recommending separate chair and CEO roles to divide responsibilities between two capable leaders, to manage a crisis, or during succession), available at https://www.oliverwyman.com/content/dam/oliver-wyman/global/en/files/archive/2004/OWD_Separating_the_Roles_of_CEO-Chairman_WP_1110.pdf.

[67] Idalene F. Kesner, Directors’ Characteristics and Committee Membership: An Investigation of Type, Occupation, Tenure, and Gender, 31(1) Academy of Mgmt. J. 66, 69 (1988).

[68] Id. at 73.

[69] Id.

[70] Diana Bilimoria and Sandy Kristin Piderit, Qualifications of Corporate Board Committee Members, 19(3) Group & Org. Mgmt 334, 352 (Sept. 1994) (reporting an average age of 61 and 62 years for committee members versus 59 for nonmembers, and an average of 4.5 board memberships for committee members versus 3.5 board memberships for nonmembers).

[71] Id.; EY Center for Board Matters, supra note 26.

[72] Id.

[73] Amy Hillman et al., Women and Racial Minorities in the Boardroom: How Do Directors Differ?, 28(6) J. of Mgmt 747, 748 (2002).

[74] Board Monitor – Trends in board composition over the past five years, Heidrick & Struggles 8 (2014).

[75] Id. at 6.

[76] Id. at 8.

[77] Board Monitor – Board Diversity at an Impasse?, Heidrick & Struggles 12.

[78] Trends in board composition, supra note 74, at 4.

[79] Kesner, supra note 67, at 70.

[80] Hillman et al., supra note 73, at 748.

[81] EY Center for Board Matters, supra note 26.

[82] Hillman et al., supra note 73, at 747.

[83] Board Diversity at an Impasse?, supra note 77, at 7.

[84] Id.

[85] Proxy Paper Guidelines, Glass Lewis 19, 26 (2019).

[86] Christopher P. Skroupa, Latest Trends In Addressing Boardroom Diversity, Forbes (Sept. 27, 2018), https://www.forbes.com/sites/christopherskroupa/2018/09/27/latest-trends-in-addressing-boardroom-diversity/#79120e9f52fc.

[87] Anthony Goodman and Rusty O’Kelley, Institutional Investors Lead the Push for More Gender-Diverse Boards, Russell Reynolds Associates (Apr. 2017), available at https://www.russellreynolds.com/en/Insights/thought-leadership/Documents/Institutional%20Investors%20Lead%20Push%20for%20Gender-Diverse%20Boards_final.pdf.

[88] Amy Whyte, State Street to Turn Up the Heat on All-Male Boards, Institutional Investor, Inc. (Sept. 27, 2018), https://www.institutionalinvestor.com/article/b1b4fh28ys3mr9/State-Street-to-Turn-Up-the-Heat-on-All-Male-Boards.

[89] Id.

[90] Proxy voting guidelines for U.S. securities, BlackRock 4 (Jan. 2019).

[91] F. William McNabb III, Chairman and CEO, Vanguard, An open letter to directors of public companies worldwide 2 (Aug. 31, 2017).

[92] Pamela M. Harper, Corporate Board Diversity: Gaining Traction Through Investor Stewardship, Bus. Law Today (July 16, 2018), https://businesslawtoday.org/2018/07/corporate-board-diversity-gaining-traction-investor-stewardship/.

[93] Id.

[94] Id.

[95] Guhan Subramanian, Corporate Governance 2.0, Harvard Business Review (Mar. 2015), available at https://hbr.org/2015/03/corporate-governance-2-0.

[96] See Id.

[97] Lucian A. Bebchuk et. al., The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 Stanford Law Review [ ] (2002).

[98] Robert Daines, Can Staggered Boards Improve Value? Evidence from the Massachusetts Natural Experiment, Harv. Bus. School Working Paper 16-105 (Sept. 2016).

[99] One paper adding causal evidence in support of a negative relationship between staggered boards and firm value is by Alma Cohen and Charles C.Y. Wang, How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment, Harv. Bus. School Working Paper 13-068 (May 17, 2013).

[100] Daines, supra note 98, at 3 (discussing the two shortcomings of empirical work so far, and also adding evidence that staggered boards might provide heterogeneous firm value).

[101] Id. at fn.1.

[102] Id. at fn.2.

[103] EY Center for Board Matters, supra note 26; Stephen Choi et al., The Power of Proxy Advisors: Myth or Reality?, 59 Emory Law Journal 869, 873 (2010).

[104] Subramanian, supra note 95.

[105] Id.

[106] James Cheap, Board Classification and Diversity in Recent IPOs, Harv. Law School Forum on Corp. Gov. and Fin. Reg. (Apr. 24, 2018), https://corpgov.law.harvard.edu/2018/04/24/board-classification-and-diversity-in-recent-ipos/; David F. Larcker and Brian Tayan, Scaling Up: The Implementation of Corporate Governance in Pre-IPO Companies, Stanford Closer Look Series 2 (Dec. 3, 2018).

[107] Noam Noked, Activism and the Move toward Annual Director Elections, Harv. Law School Forum on Corp. Gov. and Fin. Reg. (Jan. 15, 2012) (noting that 65% of shareholder votes cast from 2002 to 2012 were in favor of de-staggering boards).

[108] Cohen and Wang, supra note 99, at 1.

[109] See e.g., Proxy Paper Guidelines, Glass Lewis 25 (2019).

[110] Noked, supra note 107.

[111] Id.

[112] Shareholder Rights Project, http://www.srp.law.harvard.edu/companies-entering-into-agreements.shtml.

[113] Id.

[114] Bo Becker and Guhan Subramanian, Improving Director Elections, 3 Harv. Bus. L. Rev. 1, 10 (2013).

[115] Id.

[116] Stephen Choi et al., Does Majority Voting Improve Board Accountability?, 83 U. of Chi. L.R. 1119, 1126 (2016).

[117] Id.

[118] E.g., Jill E. Fisch, The Transamerica Case, in The Iconic Cases in Corporate Law 46, 68–9 (Jonathan R. Macey ed., 2008) (explaining the concepts of “withheld” votes and majority voting).

[119] Brooke A. Masters, Proxy Measures Pushing Corporate Accountability Gain Support, Wash. Post, June 17, 2006, at D1.

[120] Marcel Kahan & Edward Rock, Embattled CEOs, 88 Tex. L. Rev. 987, 1,010 (2010); Becker and Subramanian, supra note 114, at 11.

[121] Becker and Subramanian, supra note 114, at 11.

[122] Id.

[123] Choi et al., supra note 116, at 1125 fn. 29.

[124] Becker and Subramanian, supra note 114, at 10.

[125] Joseph A. Grundfest, Just Vote No: A Minimalist Strategy for Dealing with Barbarians inside the Gates, 45 Stan. L.R. 857, 865 (Apr. 1993).

[126] Id.

[127] Id. at 867.

[128] See Diane Del Guercio et al., Do Boards Pay Attention When Institutional Investor Activists “Just Vote No”?, 90 J. Fin. Econ. 84 (2008) (studying 112 publicly announced “just vote no” campaigns sponsored by institutional investors between 1990 and 2003).

[129] Majority Voting in Director Elections: From the Symbolic to the Democratic, ISS at App. iii (2015).

[130] Bruce Orwall, Calpers to Withhold Voting for Eisner, Wall St. J. (Feb. 26, 2004), https://www.wsj.com/articles/SB107774511301139206.

[131] Majority Voting in Director Elections: From the Symbolic to the Democratic, ISS 16 (2015); Institutional Shareholder Services Takes Stand on Majority Vote Standard, PR Newswire (Mar. 11, 2005), https://perma.cc/2YCY-8VJA.

[132] Majority Voting for Directors: The Latest Corporate Governance Initiative, Latham & Watkins LLP 2 (Dec. 9, 2005), available at https://www.lw.com/upload/pubContent/_pdf/pub1437_1.pdf.

[133] Stephen Choi et al., The Power of Proxy Advisors: Myth or Reality?, 59 Emory Law Journal 869, 873 (2010); Stephen Choi et al., Director Elections and the Role of Proxy Advisors, 82 Southern Cal. L. Review 649 (2009); Jennifer E. Bethel and Stuart L. Gillan, The Impact of the Institutional and Regulatory Environment on Shareholder Voting, 31(4) Fin. Mgmt 29 (2002); Cindy R. Alexander et al., The Role of Advisory Services in Proxy Voting (Nat’l Bureau of Econ. Research, Working Paper Vo. 15143, 2008), available at http://www.nber.org/paper/w15143.

[134] Proxy Paper Guidelines, Glass Lewis 27 (2019).

[135] See Proxy Paper Guidelines, Glass Lewis 27–28 (2019).

[136] Kahan and Rock, supra note 120, at 1,010.

[137] Id.

[138] 1/3 of director seats up for election every year.

[139] Choi et al., supra note 116, at 1128.

[140] William K. Sjostrom Jr. and Young Sang Kim, Majority Voting for the Election of Directors, 40 Conn. L. Rev. 459, 489–90 (2007).

[141] Jay Cai et al., A Paper Tiger? An Empirical Analysis of Majority Voting, 21 J. Corp. Fin. 119, 131–32 (2013).

[142] Yonca Ertimur et al., Does the Director Election System Matter? Evidence from Majority Voting, 20 Rev. Accounting Stud. 1, 6–16 (2015).

[143] Nickolay M. Gantchev, The Costs of Shareholder Activism: Evidence from a Sequential Decision Model 4 (Fall, 2011), available at http://repository.upenn.edu/edissertations/442.

[144] Mike Coronato, 2017 Proxy Fights: High Cost, Low Volume, FactSet (Nov. 6, 2017), https://insight.factset.com/2017-proxy-fights-high-cost-low-volume.

[145] Becker and Subramanian, supra note 114, at 9.

[146] Subramanian, supra note 95.

[147] Staff Report, Review of the Proxy Process Regarding the Nomination and Election of Directors, July 15, 2003.

[148] Id.

[149] Id.

[150] Id.

[151] See Mary Schapiro, Chairman, Sec. & Exch. Comm’n, Opening statement at Aug. 25, 2010 SEC meeting, available at https://corpgov.law.harvard.edu/2010/08/25/facilitating-shareholder-director-nominations/.

[152] Shifeng Ni, Proxy Access Revisited: Regulatory Function of the Rule 14a-11 Formula, The CLS Blue Sky Blog (Oct. 30, 2015), http://clsbluesky.law.columbia.edu/2015/10/30/proxy-access-revisited-regulatory-function-of-the-rule-14a-11-formula/.

[153] Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir., Jul. 22, 2011).

[154] Facilitating Shareholder Director Nominations, SEC 33 (Nov. 15, 2010), https://www.sec.gov/rules/final/2010/33-9136.pdf; Proxy Access Revisited, supra note 23; Companies “will be permitted to exclude a shareholder proposal pursuant to Rule 14a-8(i)(8) if it: Would disqualify a nominee who is standing for election; Would remove a director from office before his or her term expired; Questions the competence, business judgment, or character of one or more nominees or directors; Seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or Otherwise could affect the outcome of the upcoming election of directors.” Facilitating Shareholder Director Nominations – A Small Entity Compliance Guide, SEC (last modified Sept. 19, 2011), https://www.sec.gov/info/smallbus/secg/14a-8-secg.htm.

[155] Avrohom J. Kess, Proxy Access Proposals, Harvard Law School Forum on Corporate Governance and Financial Regulation (Aug. 10, 2015); Yafit Cohn, The 2016 Proxy Season: Proxy Access Proposals, Harvard Law School Forum on Corporate Governance and Financial Regulation (Aug. 26, 2016).

[156] Id.

[157] Marc S. Gerber, Proxy Access: Highlights of the 2017 Proxy Season, Harvard Law School Forum on Corporate Governance and Financial Regulation (July 1, 2017).

[158] Yafit Cohn, The 2016 Proxy Season: Proxy Access Proposals, Harvard Law School Forum on Corporate Governance and Financial Regulation (Aug. 26, 2016).

[159] Gerber, supra note 157.

[160] See id.; Stephen T. Glove, Proxy Access Proposals, Harvard Law School Forum on Corporate Governance and Financial Regulation (Oct. 19, 2018).

[161] Matteo Tonello, Shareholder Voting in the United States: Trends and Statistics on the 2015-2018 Proxy Season, Harv. Law School Forum on Corp. Gov. and Fin. Reg. (Nov. 26, 2018).

[162] EY Center for Board Matters, supra note 26.

[163] Kess, supra note 155.

[164] Id.

[165] And still does today. Proxy Paper Guidelines, Glass Lewis 27 (2019).

[166] Kess, supra note 155.

[167] Id.

[168] Id.

[169] Audit committee requirements and governance topics, Deloitte 7 (Apr. 2018), available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/center-for-board-effectiveness/us-audit-committee-resource-guide-section-1.pdf.

[170] Id.

[171] Id. at 8.

[172] An “audit committee financial expert” is someone who has “(i) An understanding of generally accepted accounting principles and financial statements; (ii) The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (iii) Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) An understanding of internal controls and procedures for financial reporting; and (v) An understanding of audit committee functions.” 17 C.F.R. § 228.401(e)(2).

[173] The NYSE leaves this qualification to be “interpreted by the listed company’s board in its business judgment”. Commentary to NYSE Rule 303A.07(a).

[174] Each “Company must certify that it has, and will continue to have, at least one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.” NASDAQ Rule 5605(c)(2)(A).

[175] Audit committee requirements and governance topics, supra note 169, at 5–6.

[176] See Sheila D. Foster & Bruce A. Strauch, Auditing Cases That Made A Difference: Mckesson & Robbins, 5(4) J. of Bus. Case Studies 6–7 (July/Aug. 2009), available at https://clutejournals.com/index.php/JBCS/article/view/4708/4797; Gerald T. Nowak & Stephanie S. Liang, Putting Audit Committee Reform In Its Historical Context: Revolution Or Evolution?, Corporate Counsel A7 (Jan. 2003).

[177] Gerald T. Nowak & Stephanie S. Liang, Putting Audit Committee Reform In Its Historical Context: Revolution Or Evolution?, Corporate Counsel A7 (Jan. 2003).

[178] Brenda S. Birkett, The Recent History of Corporate Audit Committees, Accounting Information (last visited Mar. 25, 2019), http://www.accountingin.com/accounting-historians-journal/volume-13-number-2/the-recent-history-of-corporate-audit-committees/.

[179]  Nowak and Liang, supra note 176; 15 U.S.C. § 78dd-1 et seq.; Melissa Klein Aguilar, Audit Committee Checklist : FCPA Compliance, Compliance Week (July 13, 2010), https://www.complianceweek.com/news/news-article/audit-committee-checklist-fcpa-compliance.

[180] Nowak and Liang, supra note 176; also Edward F. Greene and Bernard B. Falk, The Audit Committee – A Measured Contribution to Corporate Governance: A Realistic Appraisal of Its Objectives and Functions, 34(3) The Bus. Lawyer 1229, 1235 (Apr. 1979).

[181] Id.

[182] Id.

[183] SEC Approves NYSE and NASDAQ Revised Listing Rules Regarding the Independence of Compensation Committees and Their Advisers, Proskauer (Mar. 2013), https://www.proskauer.com/newsletter/special-report-sec-approves-nyse-and-nasdaq-revised-listing-rules.

[184] NYSE Rule 303A.05(a); NASDAQ Rule 5605(d).

[185] NYSE Rule 303A.05(a); NASDAQ Rule 5605(d)(2)(A); Michael J. Segal, 2017 Compensation Committee Guide, Harvard Law School Forum on Corporate Governance and Financial Regulation (Mar. 29, 2017), https://corpgov.law.harvard.edu/2017/03/29/2017-compensation-committee-guide/.

[186] Segal, supra note 185.

[187] Id.

[188] Id.

[189] Id.

[190] Press release, SEC, SEC Adopts Rules for Say-on-Pay and Golden Parachute Compensation as Required Under Dodd-Frank Act (Jan. 25, 2011), https://www.sec.gov/news/press/2011/2011-25.htm; Compensation Committee Guide, Wachtell, Lipton, Rosen & Katz 72 (2017).

[191] Ian Dew-Becker, How Much Sunlight Does it Take to Disinfect a Boardroom? A Short History of Executive Compensation Regulation, CESifo Working Paper No. 2379 at 2 (Aug. 2008).

[192] NEOs are: “(i) All individuals serving as the registrant’s principal executive officer or acting in a similar capacity during the last completed fiscal year (“PEO”), regardless of compensation level; (ii) All individuals serving as the registrant’s principal financial officer or acting in a similar capacity during the last completed fiscal year (“PFO”), regardless of compensation level; (iii) The registrant’s three most highly compensated executive officers other than the PEO and PFO who were serving as executive officers at the end of the last completed fiscal year; and (iv) Up to two additional individuals for whom disclosure would have been provided pursuant to paragraph [(iii) above] but for the fact that the individual was not serving as an executive officer of the registrant at the end of the last completed fiscal year.” 17 C.F.R. § 229.402(a)(3).

[193] Compensation Committee Guide, Wachtell, Lipton, Rosen & Katz 71 (2017).

[194] Chapman Insights: Corporate Governance Quarterly Update, Chapman and Cutler LLP (2016), available at https://www.chapman.com/media/publication/710_Chapman_Say-On-Pay_Frequency_120616.pdf.

[195] Compensation Committee Guide, supra note 193, at 72.

[196] Id. at 72; see also, 2016 Say on Pay Results: End of Year Report, Semler Brossy (Feb. 1, 2017), available at http://www.semlerbrossy.com/wp-content/uploads/SBCG-2016-Year-End-Say-on-Pay-Report-02-01-2017.pdf.

[197] U.S. Compensation Policies: Frequently Asked Questions, ISS 10 (Updated Dec. 20, 2018), available at https://www.issgovernance.com/file/policy/latest/americas/US-Compensation-Policies-FAQ.pdf.

[198] Id. at 11.

[199] See A Say-on-Pay Update – Plus Strategies for Responding to a Negative Recommendation by a Proxy Advisory Firm, Davis Polk 8 (Nov. 29, 2018), available at https://www.davispolk.com/files/2018-11-29-a_say-on-pay_update_plus_strategies.pdf.

[200] The Impact of Say on Pay: Analyzing Changes Following a Failed 2013 Vote, Equilar (Apr. 27, 2015), https://www.equilar.com/reports/17.5-impact-of-say-on-pay.html.

[201] Jill E. Fisch et al., Is Say on Pay All About Pay? The Impact of Firm Performance, Harvard Law School Forum on Corporate Governance and Financial Regulation (Oct. 30, 2017), https://corpgov.law.harvard.edu/2017/10/30/is-say-on-pay-all-about-pay-the-impact-of-firm-performance/.