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Evaluating Pension Fund Investments Through The Lens Of Good Corporate Governance

Commissioner Luis A. Aguilar

Latinos on Fast Track (LOFT) Investors Forum<br>Hispanic Heritage Foundation<br>Washington, D.C.

June 27, 2014

Thank you for that kind introduction.  I am pleased and honored to be here today.  I have had the opportunity of speaking at a number of Latinos on Fast Track events.  The distinguished guests and participants at each of these LOFT events have always been impressive, and I commend the Hispanic Heritage Foundation for organizing today’s forum.  Before I begin my remarks, however, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC”), my fellow Commissioners, or members of the staff.

I understand today’s participants include a number of trustees and asset managers for some of the country’s largest public and private pension funds.  Without a doubt, pension funds play an important role in our capital markets and the global economy.  This is due, in part, to the fast growth in pension fund assets, both in the public and private sectors. 

For example, since 1993, total public pension fund assets have grown from about $1.3 trillion to over $4.3 trillion in 2011.[1]  Over that same period, total private pension fund assets more than doubled from roughly $2.3 trillion to over $6.3 trillion by 2011.[2]  As of December 2013, total pension assets have reached more than $18 trillion.[3]  This growth was fueled by many factors, including the rise in government support of retirement benefits, and the increased use by companies of pension plans as a way to supplement wages.[4]

In conjunction with the growth in pension assets, the total number of individuals participating in pension funds has also grown.  For example, in 1993, there were roughly 24 million participants in public pension funds and 84 million in private pension funds.[5]  By 2011, those numbers grew to more than 32.7 million and 129 million, respectively.[6]  Unsurprisingly, pension fund contributions have followed a similar path, with roughly $119 billion in total public pension fund contributions in 1993 to more than $284 billion in public pension fund contributions in 2011.[7]  Similarly, in 1993, total private pension fund contributions totaled more than $154 billion, while this number grew to more than $465 billion by 2011.[8]

The remarkable growth in pension fund assets, however, is accompanied by a number of challenges—including growing concerns that the ultimate beneficiaries of the funds might not get their promised benefits.  In particular, pension fund trustees have been dealing with the problem of chronically underfunded pension funds.[9]  In fact, just two days ago, Standard & Poor’s released a 2014 survey in which it found that the 50-state average funded ratio for state-sponsored pension funds fell by two percentage points to 70.9% in 2012 from 72.9% in 2011.[10]  Another study found that, as of 2012, 30 state-sponsored pension funds were funded at less than 75% of their current and future pension obligations.[11]  Indeed, three of these state pension funds were funded at less than 50%.[12]  According to another report, at the end of 2013, state and local governments’ unfunded public pension liabilities were estimated to be between $750 billion and $4.4 trillion, depending on the discount rate assumptions used in the calculations.[13]  It has also been recently reported that 85% of public pension plans may default over the next 30 years, assuming investment returns of 4%.[14]

Private pension funds are also facing challenges—particularly as was evidenced by the impact on their portfolios by the 2008 financial crisis.[15]  Although the situation is improving for some private pension plans, many multiemployer pension plans are still in danger of insolvency.[16]  For example, a March 2013 study conducted by the U.S. Government Accountability Office (“GAO”) on private multiemployer pension plans found that 40% of multiemployer pension plans had not emerged from critical or endangered status.[17]  That same study found that the Pension Benefit Guaranty Corporation (“PBGC”) expected the number of multiemployer pension plan insolvencies to more than double by 2017, while the financial assistance that PBGC provides to such plans could be exhausted within the next ten to 15 years.[18]

As to public pension plans, a March 2012 study conducted by the GAO on state and local government pension plans indicated that most large plans have assets on hand sufficient to cover benefit payments to retirees for at least a decade or more.[19]  However, the same study showed that the gap between asset values and projected liabilities had widened, leading to long-term concerns about sustainability.[20]

That being said, as was recently reported, since the 2008 financial crisis it appears that many states have closed funding gaps and made reforms to public pension funds.[21]  Only time will tell if those reforms will solve the long-term problem in the funding of retirement benefits.

Clearly, however, serious challenges remain.  For pension fund trustees and asset managers, one aspect of meeting these challenges is to make sound investment decisions and increase investment returns.[22]  And, yes, I know that is much easier said than done.  Certainly, investment decisions involve many difficult and complex factors, including appropriate asset allocation among equity and fixed-income investments, allocating between domestic and international investments, allocating among different industry sectors, and, of course, selecting the best individual investments possible.[23]

Today, I want to focus on one aspect of the investment decision process that cuts across many of your investments—and that is the assessment of the strength of a company’s corporate governance.

It is often said that good corporate governance helps reduce a company’s investment risk, ensures the effective deployment of shareholder capital, and ultimately contributes to the long-term performance of public companies.[24]  In addition, a robust corporate governance infrastructure enables a company to better understand where risks can arise, including emerging risks like cybersecurity.[25]  Among other reasons, this is because focusing on strong corporate governance helps companies hire and incentivize good managers, while at the same time promoting accountability.[26]  On the other hand, the absence of a robust corporate governance infrastructure can lead to poor decisions resulting in bad outcomes for the company and its shareholders.[27]  Ultimately, focusing on the quality of a company’s corporate governance infrastructure often provides answers to the most common questions for investors, such as management effectiveness, corporate transparency, executive accountability, and the ability of shareholders to participate in company decisions. 

To that end, I want to focus on a few corporate governance areas that merit particular attention—and that are areas you can favorably impact:

  • First, ensuring that the corporate governance infrastructure permits and protects appropriate shareholder engagement;

  • Second, the importance of aligning executive compensation with performance;

  • Third, the need to ensure high quality financial reporting; and

  • Finally, the benefits of promoting diversity in the boardroom.

Pension Fund Engagement with Management

Given the significant role that good corporate governance plays in improving a company’s long-term performance, it makes sense for pension funds to be more involved with their portfolio companies as a way of achieving better returns for their investments.[28]  Because of their funds’ long-term investment horizon and the significant size of their investment portfolios, pension funds are well-situated to communicate with their portfolio companies and to demand good corporate governance practices.

Pension funds can engage with their portfolio companies in several ways, for example, through informal discussions with the company’s board and management, or through the formal process of voting your shares and by submitting shareholder proposals for consideration at the company’s annual meetings.[29]

Usually, for pension fund trustees and asset managers, the way you normally communicate with your companies is by exercising the power to vote the shares you own.[30]  In fact, voting the shares is one of your fiduciary obligations.  As the U.S. Department of Labor has stated, “the fiduciary act of managing [fund] assets [that] are shares of corporate stock … include[s] the voting of proxies [relating] to those shares of stock.”[31]

The importance of voting shares also brings with it the responsibility to monitor company policies to make sure that they are supportive of the voting rights of shareholders and do not seek to limit shareholder rights.  For example, it has been suggested that company policies that seek to adjust or restrict share voting rights, such as the issuance of new classes of stock with unequal voting rights called “dual-class voting,” may at times be designed to limit shareholder rights by enhancing certain classes of shares over others.[32]  Likewise, proposals for supermajority voting requirements and poison pill plans have been said to be used, at times, to undermine the rights of one set of constituents over other constituents.[33]

It has long been understood that a pension fund trustee’s first interest is to proactively preserve its right as an owner of the company.[34]  To that end, pension fund trustees must be vigilant in preserving their ownership right by proactively monitoring and working against restrictions on shareholder rights—and by supporting measures that enhance shareholder rights and their ability to communicate their views.

Moreover, because communications with other shareholders can also bring benefits, pension funds should encourage their portfolio companies to establish forums that allow shareholders to communicate with other shareholders.  For example, there are a few progressive companies that have developed online shareholder forums where shareholders can pose questions to the company on a real-time basis, view other shareholders’ questions and the company’s responses, and engage in online discussions with other shareholders.[35]  The SEC has tried to encourage these forums, and in January 2008, the Commission adopted rules to facilitate the use of electronic shareholder forums by public companies and their shareholders.  Unfortunately, these forums have not yet been widely adopted by U.S. domestic issuers.[36]  I believe that good corporate governance starts with communication and transparency, and I encourage you to explore these kinds of forums with your portfolio companies.  I also ask that you let the Commission know of any needed improvements to the 2008 rule that could make these forums more common and more useful.

Aligning Executive Compensation with Performance

Another indicator of whether a company has good corporate governance oversight—and whether the board of directors is doing its job—is by determining whether the company’s executive compensation is aligned with the company’s performance.  

Clearly, sound compensation policies and practices are fundamental to sustainable, long-term corporate growth and performance.[37]  However, there are questions as to whether, over the years, compensation policies have changed to the detriment of shareholders.[38]  For example, over the last 30 years, we have witnessed an unprecedented growth in the compensation of corporate executives.[39]  A 2012 study showed, for example, that the average annual earnings of the top 1% of wage earners grew 156% from 1979 to 2007, and for the top 0.1% they grew 362%.[40]  During this same period, there has also been a dramatic increase in the pay gap between the compensation of company executives and that of rank-and-file workers.[41]  For example, in 1980, it was estimated that the average CEO was paid about 42 times the typical worker’s pay; by 2013, however, a study by Bloomberg found that large public company CEOs were paid an average of 204 times the compensation of rank-and-file workers in their industries.[42]

The unprecedented growth of executive pay and the widening pay gap between executives and rank-and-file workers raise important questions about the rational relationship between executive compensation and corporate performance, and whether shareholders have benefitted from these trends.[43]  For instance, one study found that an investment strategy that involved buying shares of companies in the lowest 2% of the incentive pay distribution and selling shares of companies in the highest 2% would have earned higher-than-average returns of more than 11% per year during the testing period.[44]  Another study debunked the idea that large executive compensation packages are necessary to motivate executives and to align their interests with investors.  To the contrary, the study found that executives gave less weight to the value of long-term incentive plans to the point that the amounts offered needed to be enormous to even affect motivation.[45]

Moreover, runaway executive compensation packages may incentivize excessive or inappropriate risk taking to the detriment of investors.  In other words, the potential for a pot of gold may lead executive management to take risks they otherwise would not take.  Indeed, one recent study found that excessive incentive pay increases a CEO’s motivation to make riskier decisions that open the door to greater increases in the CEO’s overall pay.[46]  In this scenario, when the risks do not pay-off, investors get the short end of the stick.

One way for pension funds to ensure that a company maintains sound compensation policies and practices is to weigh-in on the company’s overall approach to compensation.  Specifically, under Section 951 of the Dodd-Frank Act,[47] public companies are required to conduct shareholder advisory votes to approve the compensation of executives at least once every three years.[48]  Although these so-called “say-on-pay” votes[49] are not directly binding on the corporation, experience demonstrates that corporate boards pay close attention to the voting results and that they will seek to avoid “no” votes greater than 25-30%.[50]  Early signs suggest that some companies have reacted positively to the say-on-pay regime, and they have begun to re-evaluate compensation packages when pay outstrips performance.[51]

Because a poorly conceived executive compensation plan can negatively impact shareholder value and because they can create inappropriate incentives for executives to take on excessive risks, shareholders must exercise particular care in evaluating whether compensation policies and practices are aligned with shareholder interests—and how the boards exercise their oversight responsibility.

Ensuring High Quality Financial Reporting 

Good corporate governance also extends to financial reporting.  A properly functioning financial reporting system is necessary to ensure credible financial information.  Both shareholders and boards of directors need transparent, accurate, and reliable financial information both to evaluate and assess a company’s business outlook and, separately, to evaluate management performance.

In fact, a public company’s failure to provide accurate and meaningful disclosure to investors can be devastating.  It was not too long ago that investor confidence in the capital markets was eroded in the wake of the accounting scandals at Enron, WorldCom, HealthSouth, Tyco, and others. 

In response to these accounting scandals, Congress passed the Sarbanes-Oxley Act of 2002, which, among other things, required company management to implement, test, and monitor internal control systems so as to ensure accurate financial reporting.[52]  It also required an outside auditor to attest to management’s assessment of internal controls.[53]  Two years ago, however, Congress passed the Jumpstart Our Business Startups Act (“JOBS Act”), which, among other things, largely extinguished the outside auditor attestation requirements for new public companies during the first five years of their existence.[54]  This eliminated a critical component to assessing a company’s internal controls.[55]  Due to the absence of this oversight mechanism, shareholders now need to be even more vigilant in monitoring the financial reporting and internal control systems of these new issuers.

To that end, pension funds and their managers should focus on whether the boards of directors of their portfolio companies have strong corporate governance processes for overseeing the companies’ financial reporting, and whether the companies’ internal control systems include engaged audit committees, strong company policies, and verification from independent outside auditors.  

The strength in our capital markets ultimately requires that shareholders have confidence in the accuracy of companies’ financial information.  When all is said and done, in order for shareholders to have confidence in a company’s financial information, however, shareholders first need to have confidence in the board’s corporate governance oversight of the company’s financial reporting process.

Diversity in the Boardroom

In addition, in deciding how to allocate investment assets, you should also consider how the composition of a company’s board of directors affects long-term performance.  For example, studies have indicated that diversity in the boardroom—referring to the traditional categories of gender, race, and ethnicity—results in real value for both companies and shareholders.[56]  One study that compared the financial performance of S&P 500 companies with differing numbers of women and minority directors concluded that companies with more diversity had better stock returns and less risk of loss for shareholders.[57]  Similarly, a 2012 study on the share price performance of companies over a six-year period from 2005 through 2011 found that companies with at least some female board representation outperformed those with no women on their boards.[58]

Unfortunately, notwithstanding these studies, corporate board diversity remains dismal.  For example, a 2012 study on Fortune 100 boards of directors found that women and minorities remained substantially underrepresented in corporate boardrooms, and, combined, represented just over 30% of the 1,214 seats.[59]  The same study found that women and minorities were also underrepresented in Fortune 500 boardrooms, with white males accounting for more than 73% of the 5,488 available board seats, and women collectively holding only 16.6% of those seats.  The composition of the Fortune 500 board seats broken down by race and ethnicity is even more disappointing, with African-Americans holding just 7.4% of the available board seats and Hispanics and Asians holding about 3.3% and 2.6% of those seats, respectively.[60]

Shareholders can have a powerful impact on corporate diversity.  Recently, for example, as a result of stinging public criticism because its board of directors only had one female director in a board of all white men, Apple Computer revised its corporate charter to say it is now “committed to actively seeking out highly qualified women and individuals from minority groups to include in the pool from which Board nominees are chosen.”[61]  As you exercise your fiduciary duties and obligations as pension fund trustees and asset managers, you should pay close attention to the importance of diversity in the boardroom and how it could impact the company’s bottom line.  Your voices can make a difference—and you should not hesitate in making them heard.


As I conclude my remarks, I want to acknowledge again the significant challenges faced by pension funds.  You are required to invest prudently, in a diversified manner, at low costs, in a way that ensures reasonable long-term investment returns.  You are asked to do so in an environment with ever-increasing obligations, less contributions, volatile markets, and a ballooning retirement wave.  This is no doubt a very challenging environment.

Meeting these challenges requires that, among many other factors, you effectively exercise the important ownership rights you have as shareholders.  Exercising those rights, and assuring that a company has effective corporate governance, needs to be an integral part of the investment process. 

Shareholder involvement does not mean that shareholders need to be involved in the day-to-day management of a company.  However, it does require awareness of the company’s overall corporate governance standards and making sure that they are appropriate for the particular company and that these standards are being met.

Only by being proactive, informed, and diligent can shareholders protect and enhance the value of their ownership interest.  And, as fiduciaries responsible for other people’s money, that is a particular obligation of pension fund trustees and asset managers.  I have no doubt that you are up to the task.

Thank you for having me here today.

[1] See United States Census Bureau, Survey of Public Pensions:  State- and Locally-Administered Defined Benefit Data (2012) (“U.S. Census Bureau”); available at; Employee Benefit Research Institute, EBRI Databook on Employee Benefits, Chapter 18: Federal Retirement Plans (“EBRI”), available at  (This number was calculated by aggregating the 2011 state and local pension plan asset number from the U.S. Census Bureau and the 2009 federal pension plan number from EBRI, which was the latest date for which data was available.)

[2] U.S. Department of Labor, Private Pension Plan Bulletin Historical Tables and Graphs (June 2013), available at

[3] Towers Watson, Global Pension Assets Study – 2014 (Feb. 5, 2014), available at (note:  this number includes IRAs).  Of these pension assets, public sector pension funds equaled 66%, or $12.5 trillion, of all pension fund assets outstanding, while private sector pension funds equaled 34%, or $6.4 trillion.  See id.

[4] Daniel M. Holland, Private Pension Funds: Projected Growth (1966), available at  Government support of retirement benefits includes such things as favorable tax treatment that generally provides for pension plans that permit tax-free accumulation over a working life.  See id.

[5] See supra note 1, U.S. Census Bureau and EBRI; supra note 2, U.S. Department of Labor, at 5.

[6] See supra note 1, U.S. Census Bureau and EBRI; supra note 2, U.S. Department of Labor, at 5.

[7] See supra note 1, U.S. Census Bureau and EBRI.

[8] See supra note 2, U.S. Department of Labor, at 5.  No doubt, growth in pension fund assets may also be attributed to a largely positive market over the years, although for those who still feel the wounds from the financial crisis, it is easy to forget this fact.  Save for 2008, large private pension funds at least, earned a positive total rate of return of greater than 7.5% in 14 of the 20 years between 1992 and 2011.  See supra note 2, U.S. Department of Labor, at 29.

[9] See, e.g., Floyd Norris, Private Pension Plans, Even at Big Companies, May Be Underfunded, NY Times (July 20, 2012), available at  At the same time, public pension funds are facing intense pressure from cash-strapped municipalities looking to cut short-term costs and long-term liabilities.  For example, in April 2014, the City of Chicago unveiled a plan to raise public employees’ contributions to city pension funds by 29%, which would cost city workers $55 million by 2025 and reduce their benefits by 14%.  See Fran Spielman, Analysis: Pension reforms to cost workers $55 million by 2025, Chicago Sun-Times (Apr. 17, 2014), available at  Just last month, New Jersey Governor Chris Christie announced he would slash pension contributions in that state by $2.4 billion, calling into question the state’s ability to fund pension liabilities in the future.  See Mark Magyar, Christie cuts $2.4 Billion from Pension Fund, Signaling Fight Ahead, WNYC News (May 21, 2014), available at

[10] See Kyle Glazier, S&P: Pension Funding Hits Bottom, Ready to Rise, The Bond Buyer (June 25, 2014).

[11] See Bloomberg Rankings Most Underfunded Pension Plans: States, Bloomberg (Oct. 15, 2013), available at

[12] See id. (three state pension funds—Illinois, Kentucky and Connecticut—were funded at less than 50%).  According to another report, at the end of 2013, state and local governments’ unfunded public pension liabilities were estimated to be between $750 billion and $4.4 trillion, depending on the discount rate assumptions used in the calculations.  See Jean Burson, John Carlson, O. Emre Ergungor, and Patricia Waiwood, Federal Reserve Bank of Cleveland Working Paper, Do Public Pension Obligations Affect State Funding Costs? (May 2014), available at

[13] Jean Burson, John Carlson, O. Emre Ergungor, and Patricia Waiwood, Do Public Pension Obligations Affect State Funding Costs?, Working Paper of the Federal Reserve Bank of Cleveland (May 2014), available at

[14] Matt Krantz, Report: 85% of pensions could fail in 30 years, USA Today (Apr. 9, 2014), available at (citing to recent report by hedge fund Bridgewater Associates; assuming investment returns of 4%).

[15] See Juan Yermo and Clara Severinson, OECD Working Papers on Finance, Insurance and Private Pensions No. 3, The Impact of the Financial Crisis on Defined Benefit Plans and the Need for Counter-Cyclical Funding Regulations (July 2010), available at; U.S. Government Accountability Office, Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies (Mar. 2013), at 10, available at (stating that “[i]n recent years, as a result of investment market declines, employers withdrawing from plans, and demographic challenges, many multiemployer plans have had large funding shortfalls and face an uncertain future.”).  A 2014 study found that, even with a strong global equity market performance in fiscal year 2013, the aggregate funding deficit for defined benefit pension assets for S&P 500 Index companies was at $153.9 billion.  See Wilshire, 2014 Wilshire Consulting Report on Corporate Pension Funding Levels (Apr. 3, 2014), available at

[16] Id., U.S. Government Accountability Office, Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies (Mar. 2013). 

[17] Id., U.S. Government Accountability Office, Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies (Mar. 2013), at 10 (based on 2011 data and criteria determined under the Pension Protection Act of 2006).  According to the Pension Protection Act of 2006 criteria, a plan is “endangered” if it is less than 80% funded or is projected to have a funding deficiency within seven years.  On the other hand, a plan is “critical” if (i) the plan is less than 65% funded and projects a funding deficiency within four years or projects insolvency within six years; (ii) the plan projects a funding deficiency within three years; (iii) liabilities for inactive participants are greater than for active participants, contributions are less than normal cost and interest on unfunded liabilities, and a funding deficiency is expected within four years; or (iv) the plan projects insolvency within four years.  See id. at 8.

[18] Id., U.S. Government Accountability Office, Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies (Mar. 2013).

[19] U.S. Government Accountability Office, State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability (Mar. 2012), available at

[20] Id.

[21] See Lisa Lambert, Pension groups strike back at U.S. SEC commissioner’s criticism, Reuters (June 16, 2014), available at  As reported in this article, in a recent letter to an SEC Commissioner, 11 major public finance groups, including the National Governors Association, the National Association of State Retirement Administrators, and the U.S. Conference of Mayors, among others, indicated that since the 2008 fiscal crisis, many states have made reforms and closed funding gaps in public pension funds.  See Letter to Commissioner Daniel Gallagher from the National Governors Association, et al., dated June 16, 2014, available at  Moreover, the letter indicated that total public pension fund assets equaled “16 times the annual payout for these funds, assuming no additional contributions or investment earnings.”  See id.

[22] For pension funds, increasing investment returns is less about chasing short-term gains and more about the need to ensure predictable long-term returns with the appropriate amount of risk.  See Keith P. Ambachtsheer and D. Don Ezra, Pension Fund Excellence: Creating Value for Stockholders, John Wiley & Sons (Apr. 23, 1998), at 108.

[23] Some have also suggested, for example, that investors look at specific financial metrics at companies to predict a company’s long-term performance prospects, such as focusing on companies that maximize long-term cash flows and ability to pay dividends.  See, e.g., Alfred Rappaport, The Economics of Short-Term Performance Obsession, CFA Institute’s Financial Analysts Journal, Vol. 61, No. 3 (2005), available at  Pension funds and other long-term investors also have a variety of asset types to choose from that may be particularly suitable for long-term investing, including, among other appropriate investment assets, public equity, direct private equity, infrastructure investments, real estate, long-term bonds, and private equity funds.  See The Future of Long-term Investing, World Economic Forum (2011), available at  Nonetheless, according to a 2014 Towers Watson study, pension fund assets in the United States had 57% of their assets allocated to corporate equity in 2013 (29% was allocated to bonds, 1% to cash, and 18% to “other”).  Supra note 3.

[24] TIAA-CREF Policy Statement on Corporate Governance—6th Edition, available at; Mark Da Silva, Corporate Governance – The Duties of Trustees, Barnett Waddingham (Mar. 2003), available at

[25] See Commissioner Luis A. Aguilar, Boards of Directors, Corporate Governance and Cyber-Risks: Sharpening the Focus (June 10, 2014), available at; Commissioner Luis A. Aguilar, Looking at Corporate Governance from the Investor’s Perspective (Apr. 21, 2014), available at

[26] Id., Commissioner Luis A. Aguilar, Looking at Corporate Governance from the Investor’s Perspective.

[27] Some have even suggested that pension fund trustees who overlook corporate responsibility in selecting investments may violate their fiduciary duty to their fund participants and beneficiaries.  Kristen Snow Spalding, Esq. and Matthew Kramer, PhD, What Trustees Can Do Under ERISA, Univ. of Calif. Berkeley, available at

[28] Id.

[29] Shareholders have also been known to call for a special meeting of company shareholders ahead of the annual meeting to consider actions such as non-binding shareholder resolutions on company proposed transactions.  In February 2014, for example, Starboard Value LP, a large institutional shareholder of Darden Restaurants Inc., filed a Schedule 14A preliminary proxy statement to request management to call a special meeting of shareholders to approve a non-binding resolution urging the company’s board not to approve a spin-off of the company’s Red Lobster business.  Schedule 14A preliminary proxy statement (filed Feb. 24, 2014), available at  Recently, Pershing Square Capital Management submitted a non-binding referendum on a Schedule 14A preliminary proxy statement in connection with Valeant Pharmaceuticals tender offer for Allergan, and made this non-binding referendum request outside of requesting a special meeting of shareholders or at the annual meeting, but later abandoned this unique twist on shareholder proposals.  See, Ronald Orol, Ackman ditches referendum and launches proxy contest, The Deal Pipeline (June 2, 2014), available at

[30] During the 2013 proxy season, four major public pension funds (California State Teachers’ Retirement System, State of Wisconsin Investment Board, Florida State Board of Administration, and the Ohio Public Employees Retirement System) voted in opposition of more directors and other issues than shareholders in the aggregate.  Barry B. Burr, 4 pension plans not following herd with proxy votes, Pensions&Investments (Apr. 1, 2013), available at  For more reporting on the shareholder activity of public pension funds, see Proxy Monitor 2013, available at

[31] Letter from U.S. Department of Labor to Mr. Helmuth Fandl, Chairman of the Retirement Board of Avon Products, Inc., at 3 (Feb. 23, 1988), reprinted in Pens. Rpt. (BNA) Vol. 15, No. 9 at 391 (Feb 29, 1988) and cited at Jayne Elizabeth Zanglein, Pensions, Proxies and Power: Recent Developments in the Use of Proxy Voting to Influence Corporate Governance, 7 Lab. Law. 771 (1991), available at

[32] Supra note 24, TIAA-CREF Policy Statement on Corporate Governance – 6th Edition; AFL-CIO Proxy Voting Guidelines (2012), at 12, available at

[33] Id., AFL-CIO Proxy Voting Guidelines (2012).  Some have suggested that shareholders take a close look at companies’ poison pill provisions to ensure that the triggering mechanism is not designed to entrench current board members or otherwise undermine the proxy process.  See Chicago Teachers’ Pension Fund, Proxy Voting Policy (June 2013), at 8, available at; Supra note 24, TIAA-CREF Policy Statement on Corporate Governance—6th Edition.  For example, just two months ago, a lawsuit was filed in the Delaware Chancery Court by the Third Point hedge fund against Sotheby’s on this point, whereby in the face of Third Point’s acquisition of Sotheby’s shares, the auction house’s board adopted a poison pill plan that set two triggers: a 20% limit for passive investors and a 10% threshold for activist shareholders.  See, Third Point LLC v. Ruprecht, CA 9469 Delaware Chancery Court (Wilmington) (Mar. 25, 2014); see also Steven M. Davidoff, Poison Pill’s Relevance in the Age of Shareholder Activism, NY Times Dealbook, available at  Shortly after the suit’s filing, a large public pension fund filed a follow-on suit accusing the auction house’s board of breaching their fiduciary duties to shareholders by adopting the poison pill plan. See The Employees Retirement System of the City of St. Louis v. William F. Ruprecht, et al., and Sotheby’s, CA9497 Memorandum Opinion, Delaware Chancery Court (Wilmington) (May 2, 2014), available at While the Delaware court upheld the poison pill plan because it ruled that the auction house’s board legitimately perceived a takeover threat in adopting its plan, the board ultimately terminated the poison pill plan and agreed to expand its board to include additional director seats.   See Alison Frankel, Sotheby’s lesson: Poison pills not panacea for embattled boards, Reuters (May 5, 2014), available at

[34] Supra note 24, Mark Da Silva, Corporate Governance – The Duties of Trustees.

[35] See Janet Dignan, On the way to the investor forum¸ IR Magazine (July 30, 2013), available at (describing the online shareholder forum created by Iberdrola, a Spanish utility company); see also, corporate website for Banco Santander, S.A. at (describing its Electronic Shareholders’ Forum).   

[36] Electronic Shareholder Forums, SEC Rel. No. 34-57172 (Jan.18, 2008), 73 Fed. Reg. 4450, available at; see id., Janet Dignan.

[37] See, e.g., Vanguard proxy voting, available at; supra note 33, Chicago Teachers’ Pension Fund, Proxy Voting Policy.

[38] See Peter Eavis, Executive Pay: Invasion of the Supersalaries, NY Times (Apr. 12, 2014), available at (citing to Professor Lynn Stout of Cornell University School of Law for arguing that a tax-code change made in the early 1990s that eliminated tax deductions on compensation above $1 million helped prompt widespread use of pay-for-performance metrics, and ultimately permitted executive pay to keep climbing even when shareholder returns suffered.)

[39] Lucian Bebchuk and Yaniv Grinstein, The Growth of Executive Pay, Harvard John M. Olin Center for Law, Economics, and Business Discussion Paper No. 510 (Apr. 2005), available at; Lawrence Mishel and Natalie Sabadish, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners, Economic Policy Institute Issue Brief #367 (June 26, 2013), available at  Much of that growth reflects the trend towards equity-based and other incentive compensation, which intends to meet the worthy goal of aligning the interests of corporate managers of public companies with their shareholders.

Unfortunately, many executives have been enjoying the benefits of the pay-for-performance boom, without necessarily delivering on that promised performance.  One survey found that of the 25 highest-paid CEOs for each year in a 20 year period ending in 2012 (500 total slots), 38% of these slots were held by CEOs who led firms that were bailed out or crashed during the 2008 financial crisis, were fired by their firms, or had to pay settlements or fines related to fraud charges.  Sarah Anderson, Scott Klinger, and Sam Pizzigata, Executive Excess 2013: Bailed Out, Booted, and Busted, Institute for Policy Studies (2013), available at  In fact, the development of the golden parachute has often meant that, in practice, executives like these have been rewarded handsomely for outright failure.  Eric Dash, Outsize Severance Continues for Executives, Even After Failed Tenures, NY Times (Sep. 29, 2011), available at  To give just a few examples, in 2006, Viacom gave roughly $85 million in severance pay to its then-CEO after just nine months in the top job.  See Jeff Green, Jumbo Severance Packages for Top CEOs Are Growing, BloombergBusinessweek (June 6,2013), available at; Andy Fixmer, Viacom to Pay Ousted Chief Tom Freston $84.8 Million, Bloomberg (Oct. 18, 2006), available at  In addition, the former CEO of CVS received a severance package worth $185 million when he left in early 2011, even though his company’s net earnings had declined the prior year.  See Nathaniel Parish Flannery, Executive Compensation: The True Cost of the 10 Largest CEO Severance Packages of the Past Decade, Forbes (Jan. 9, 2012), available at,  As many commenters have observed, safety nets of these sizes can undermine management incentives from the moment they are granted. See Paul Hodgson and Greg Ruel, Twenty-One U.S. CEOs with Golden Parachutes of More Than $100 Million, GMI (Jan. 2012), available at; Lucian A. Bebchuk, Alma Cohen, and Charles C.Y. Wang, Golden Parachutes and the Wealth of Shareholders, 25 J. Corp. Fin. 140-154 (2014) (“Our findings raise the possibility that, despite their positive effect on facilitating some value-increasing acquisitions, [golden parachutes] have, on average, an overall negative effect on shareholder wealth. This average negative effect could be due to GPs increasing managerial slack and/or to GPs providing executives with incentives to go along with some acquisitions that do not serve shareholder interest.”)  See, also, Sanjay Sanghoee, Golden Parachutes:  Why it’s bad business, Fortune/CNNMoney,

[40] Lawrence Mishel and Natalie Sabadish, CEO Pay and the Top 1%: How executive compensation and financial-sector pay have fueled income inequality, Economic Policy Institute (May 2, 2012), available at

[41] See, Pay Ratio Disclosure, SEC Rel. No. 33-9452 (Sep. 18, 2013), 78 Fed. Reg. 60560, available at; In September 2013, the Commission proposed the so-called Pay Ratio rule.  As proposed, the rule would cover only those public companies that are already required to provide compensation disclosure pursuant to Item 402(c) of Regulation S-K, which would exclude emerging growth companies, smaller reporting companies, and foreign private issuers.  The proposal also takes a flexible approach to the process of identifying median compensation, permitting the use of statistical sampling, the use of any consistently applied compensation measure to identify a median employee, and the use of reasonable estimates in certain calculations.  See, id., at 60560, 60591.  It is hopeful that the Pay Ratio disclosures will help investors such as pension fund trustees to evaluate the reasonableness of a CEO’s compensation in the context of a company’s overall business, and provide insight into the effectiveness of the overall compensation practices at the company.  See also, supra note 33, Chicago Teacher’s Pension Fund, Proxy Voting Policy

[42] See Elliot Blair Smith and  Phil Kuntz, CEO Pay 1,795-to-1 Multiple of Wages Skirts U.S. Law, Bloomberg (Apr. 30, 2013), available at; See also, supra note 39, Lawrence Mishel and Natalie Sabadish, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners.

[43] See Executive pay and performance, The Economist (Feb. 7, 2012), available at; Ben Steverman, CEOs and the Pay-for-Performance Puzzle, BloombergBusinessweek (Sept. 23, 2009), available at; Rick Wartzman, Why ‘Pay For Performance’ Is a Sham, Forbes (Mar. 26, 2013), available at

[44] Nick Balafas and Chris Florackis, CEO Compensation and Future Shareholder Returns: Evidence from London Stock Exchange, University of Liverpool (Oct. 29, 2013), available at;

[45] PricewaterhouseCoopers LLP, Making executive pay work: The psychology of incentives, available at

[46] See Syed Rahat AliJafri and Samir Trabelsi, Managerial Risk-Taking and CEO Excess Compensation, Goodman School of Business, Brock University, St. Catharines, Ontario (2013), available at (finding in part that companies should “reduce the excessive use of incentive pay because the higher use of incentive pay increases CEO’s incentive risk and risk load,and [sic] opensfurther [sic] avenues for them to gain excess pay.”)

[47] Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Pub. L. 111-203, § 410 (2010).

[48] Id., Dodd-Frank Act, 124 Stat. 1376 (2010); see specifically Section 951 of the Dodd-Frank Act (adding §14A of the Securities Exchange Act of 1934 (the “Exchange Act”), which generally requires a shareholder vote to approve the compensation of executives disclosed pursuant to SEC regulations).  124 Stat. 1376, 1899-00.  In January 2011, the SEC adopted final rules to implement these “say-on-pay” provisions.  Shareholder Approval of Executive Compensation and Golden Parachute Compensation, SEC Rel. No. 33-9178 (Jan. 25, 2011), 76 Fed. Reg. 6010 available at  The accountability to shareholders on executive compensation should be further enhanced when the Commission finalizes its long overdue rules to implement another provision within Section 951 of the Dodd-Frank Act, which requires large investment managers to publicly disclose their “say-on-pay” votes.  In addition, companies soliciting votes to approve merger or acquisition transactions must disclose, and in some circumstances hold a shareholder advisory vote on, any golden parachute compensation arrangements. 

[49] Id.

[50] JonesDay, 2011-12 Corporate Governance Update, 2011 RR Donnelley SEC Hot Topics Institute (2011), slide 12, available at (“Companies with a significant ‘no’ say-on-pay vote (e.g., 30% or more) should be wary of potential consequences of inaction in 2012 season”).  Cf. Institutional Shareholder Services Inc., 2011-2012 Policy Survey Summary of Results (Sept. 2011), p. 13, available at (Asked, “At what level of opposition on a say-on-pay proposal should there be an explicit response from the board regarding improvements to pay practices?”  Seventy-two percent of the investors surveyed, and 40% of the issuers surveyed, said that the board should respond to “no” votes above 30%, or lower thresholds).  See, also, Council of Institutional Investors, Say on Pay: Identifying Investor Concerns (Sept. 2011), available at

[51] See Theo Francis and Joann S. Lublin, CEO Pay Keeps Rising, but Not as Quickly, Not for All, Wall Street Journal (Mar. 27, 2014), at B1, available at

[52] Section 404(a) of the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 789, §404 (2002). 

[53] Section 404(b) of the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 789, §404 (2002). 

[54] In March 2012, Congress passed the Jumpstart our Business Startups Act (JOBS Act), which generally exempts a new public company from compliance with section 404(b)—the 404 audit—for the first five years it is a public company, as long as it does not exceed certain market capitalization or revenue thresholds (called an “Emerging Growth Company,” or “EGC”).  Jumpstart Our Business Startups Act ("JOBS Act") §103, Pub. L. No. 112-106, 126 Stat. 306 (Apr. 5, 2012).  As a result of the passage of the JOBS Act, this important mechanism for enhancing the reliability of financial statements has been lost for most public companies during this initial five year period.  See Testimony of Lynn E. Turner before the Senate Committee on Banking, Housing, and Urban Affairs (Mar. 6, 2012), at 12, citing Audit Analytics, available at (stating that the broad definition of an EGC has been estimated to include a large majority of U.S. public companies for that five year period.)   There is a question as to whether the rollback of Section 404(b) will lead to a general erosion in the overall quality of public companies’ financial reporting.  In fact, according to one study, in the first two years after passage of the JOBS Act, approximately 25% of EGCs that priced an IPO disclosed a significant deficiency or material weakness in internal control over financial reporting; none of these issuers, however, indicated an intention to voluntarily comply with Section 404(b) sooner than was required by the JOBS Act.  See Latham & Watkins, LLP, The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape (April 5, 2014), available at

[55] Id.

[56] See, e.g., Credit Suisse Research Institute, Gender diversity and corporate performance (Aug. 2012), available at; Virtcom Consulting, Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value (2009), available at

[57] Rushworth M. Kidder, Diversity on Corporate Boards – Why it Matters, Minority Business Round Table, available at  A different 2012 study looked at the executive board composition, returns on equity (“ROE”), and margins on earnings before interest and taxes (“EBIT”) of 180 publicly traded companies in France, Germany, the United Kingdom, and the United States over the period from 2008 to 2010, and found that for companies ranking in the top quartile of executive-board diversity, ROEs were 53% higher, on average, than they were for those in the bottom quartile. At the same time, EBIT margins at the most diverse companies were 14% higher, on average, than those of the least diverse companies.  See Thomas Barta, Markus Kleiner, and Tilo Neumann, Is there a payoff from top-team diversity?, McKinsey & Company (April 2012), available at  McKinsey’s study focused on two groups to score a company’s diversity that they claimed could be measured objectively from company data:  women and foreign nationals on senior teams (the latter being a proxy for “cultural diversity”).  A separate report commissioned by the California Public Employees' Retirement System (“CalPERS”) found that companies that have diverse boards not only perform better than boards without diversity, but companies without ethnic minorities and women on their boards eventually may be at a competitive disadvantage and have an under-performing share value.  Id., Virtcom Consulting.

[58] Credit Suisse Research Institute, Gender diversity and corporate performance (Aug. 2012), available at  In fact, diversity of women on boards has been shown to improve a company’s performance beyond just the stock price, but also in a number of measureable financial metrics, including a higher return on equity, lower debt-to-equity ratio and higher earnings growth.  Michael McMillan, CFA, Why Investors Must Push Harder for Greater Diversity on Corporate Boards, CFA Institute, available at  These improved metrics include the following: “(i) Better stock market performance: Stocks of large-cap companies with at least one woman board member outperformed those with all-male boards by 26% worldwide, while the outperformance of small- and mid-cap companies was 17%; (ii) Higher return on equity: Companies with at least one woman board member generated an average ROE of 16% versus 12% for companies with all-male boards; (iii) Higher earnings growth: Companies with a least one woman board member grew their earnings on average by 14% per annum versus 10% for companies with all-male boards; (iv) Lower leverage: Companies with at least one woman board member had an average debt-to-equity ratio of 48% versus 50% for companies with all-male boards; (v) Higher price to book ratio: Companies with at least one woman board member had a price-to-book ratio of 2.4 times versus 1.8 times for companies with all-male boards.

[59] Alliance for Board Diversity, Missing Pieces: Women and Minorities on Fortune 500 Boards 2012 Alliance for Board Diversity Census (Aug. 15, 2013), available at

[60] Id.  Another study found that while the number of women board members among S&P 100 companies had been trending upward, they still only represented 19.9% of board members in these companies in 2013.  Fenwick and West LLP, Gender Diversity Survey—2013 Proxy Season Results (Dec. 11, 2103), available at

[61] Apple Inc. Nominating and Corporate Governance Committee Charter (as of November 19, 2013), p.2, available at; see also Neil Hughes, Critics take issue with lack of diversity on Apple Board of Directors, appleinsider (Jan. 6, 2014), available at

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