Strong Corporate Governance Negates Securities Litigation

Other Non-Monetary Relief Included in Settlement Agreements

• In securities class action settlements, non-monetary relief extends beyond just corporate governance changes to include a range of other measures that protect investors.

• These provisions often focus on improving a company’s internal procedures, increasing transparency, and preventing future misconduct.

Internal program and policy improvements

• Compliance monitoring: To ensure that companies are fulfilling their obligations, settlement agreements may require compliance monitoring and enhanced governance. This can involve third-party audits or self-reporting mechanisms for a specified period to demonstrate adherence to new policies.

• Enhanced compliance programs: Companies may be required to revise and improve internal compliance programs and governance. This can involve implementing new training for employees and executives on securities laws, ethics, and proper disclosure practices.

• Specialized personnel: In cases involving specific areas of misconduct, such as cybersecurity, a company might agree to hire or create a dedicated cybersecurity director or committee. This commitment can carry a significant, ongoing financial cost to the company.

• Restructuring: Settlements can include mandates for restructuring operations to prevent future issues. For instance, in an Alphabet Inc. settlement, the company agreed to create a new board committee specifically for risk and compliance oversight.

Changes to shareholder rights and disclosures

• Enhanced shareholder rights: In some cases, class action settlements have mandated that companies increase shareholder power. Examples include allowing lead plaintiff’s counsel to solicit and submit candidates for the board of directors.

• Disclosure enhancements: Beyond standard periodic reporting, settlements can require companies to disclose additional information. For example, a company might have to disclose more detail on its controls or how it handles risk.

• Restrictions on insider trading: To prevent insider trading that led to the lawsuit, a settlement could restrict when company insiders are allowed to sell stock, especially when the company is repurchasing its own shares.

Future conduct undertakings and oversight

• Conduct-based injunctions: Courts can issue injunctions that prohibit a defendant from engaging in conduct that, while not inherently illegal, could still pose a risk of future harm to investors.

• Independent monitors: A settlement may include the appointment of an independent monitor to oversee the company’s operations and compliance with the settlement terms. The company must bear the cost of this oversight.

• Third-party assessments: In areas like cybersecurity, a company might agree to implement more robust testing and risk assessments conducted by independent experts.

Robust Corporate Governance and Institutional Investors

Monitoring and engagement

• Enhancing strategic decisions: They can encourage management to focus on long-term value creation rather than short-term gains.

• Promoting transparency: Engagement and monitoring incentivize companies to provide clearer financial reporting and disclosures, which builds investor trust and confidence.

Voting on shareholder proposals

• Board composition and independence: Advocating for the appointment of independent directors and challenging ineffective board members.

• Executive compensation: Opposing excessive compensation packages and pushing for clawback policies that allow for the recovery of executive pay in cases of financial misstatements.

• Environmental, social, and governance (ESG) factors: Promoting sustainable business practices, addressing climate risk, and pushing for more inclusive diversity policies.

Shareholder activism

• Force governance reforms: In settlements of securities class action lawsuits, institutional investors have successfully negotiated non-monetary provisions that compel specific changes to a company’s governance practices.

• Rally support for change: Cases like the activist hedge fund Engine No. 1’s campaign against ExxonMobil demonstrate that even smaller players can drive significant change when backed by larger institutional investors

Challenges and complexities

• Short-term vs. long-term focus: A conflict can arise between maximizing short-term returns for beneficiaries and promoting long-term corporate sustainability.

• Passive funds’ dilemma: Passive index funds, which are long-term holders, have a strong incentive to engage in governance. However, they are not rewarded for “beating the index” and may face pressure to keep fees low, potentially weakening incentives for deep monitoring.

• Influence of advisory firms: The recommendations of powerful proxy advisory firms can have an outsized influence on institutional votes, potentially standardizing rather than customizing governance practices.

• Oversight gaps: Large-cap firms often receive disproportionate scrutiny, leading to concerns about less oversight for smaller companies.

Case Where Institutional Investors Have Achieved Robust Corporate Governance Reforms

• Successful instances of institutional investor engagement leading to robust corporate governance reforms often involve a combination of shareholder activism and legal action.

• These cases demonstrate how institutional investors can leverage their influence to demand better accountability and transparency, ultimately reshaping a company’s leadership and strategic direction.

Engine No. 1 and ExxonMobil (2021)

• Background: The hedge fund Engine No. 1, which owned only a tiny fraction of ExxonMobil’s shares, launched a campaign criticizing the oil giant’s long-term strategy, arguing its resistance to a low-carbon future would be detrimental to its value.

• Institutional investor support: Engine No. 1 rallied support from major institutional investors, including BlackRock and Vanguard, by framing the climate transition as a long-term profitability issue.

• Outcome: Despite fierce opposition from management, Engine No. 1 succeeded in electing three independent directors with renewable energy expertise to ExxonMobil’s board

• Governance reform: The victory demonstrated how institutional investors can successfully challenge and reshape a company’s board and strategy, even in a hostile environment.

Enron Corp. (2001)

• Following the Enron accounting scandal, institutional investors acted as lead plaintiffs in a securities class action that resulted in extensive governance reforms.

• The lawsuit against Enron and third parties led to a $7.2 billion settlement, which included provisions for increased independent directors, strengthened audit committee oversight, and enhanced board oversight of management.

WorldCom, Inc. (2002)

• Another significant accounting scandal involving WorldCom also saw institutional investors achieve governance reforms through a class action lawsuit.

• As lead plaintiffs, institutional investors secured a settlement of over $6.1 billion for affected shareholders.

• The settlement also mandated robust corporate governance changes, such as implementing stricter internal controls, revising corporate policies, and included payments from former directors’ personal assets to highlight accountability.

Westinghouse (1992)

• This case illustrates how institutional investors can achieve governance improvements through direct engagement.

• Several institutional investors, concerned about issues at Westinghouse’s credit subsidiary, met with management to advocate for changes.

• This engagement led to Westinghouse dismantling its poison pill and eliminating its staggered board, making management more responsive to shareholder interests by facilitating the election of new directors.

• These cases demonstrate that institutional investors can influence corporate governance through various methods like litigation, proxy fights, and direct engagement, leading to improvements in corporate accountability and strategy.

PRE-AND POST-PSLRA STANDARDS FOR SECURITIES FRAUD LITIGATION

Current Examples of Institutional Investors Driving Corporate Governance Changes

• Institutional investors have increasingly become powerful drivers of corporate governance changes, particularly regarding environmental, social, and governance (ESG) factors.

• They utilize shareholder proposals, proxy voting, and direct engagement to influence companies on climate risk, executive compensation, board composition, and more.limate change and ESG oversight

• ExxonMobil (2021) and Engine No. 1: In a landmark case, the small hedge fund Engine No. 1, backed by major institutional investors like BlackRock, Vanguard, and State Street, successfully elected three climate-focused directors to ExxonMobil’s board. The activist argument hinged on the financial risks of ignoring the energy transition, demonstrating how large institutions can align with a push for long-term strategic shifts.

• Climate transition plans: As seen in 2024, institutional investors have used shareholder proposals to demand that financial services companies like Goldman Sachs and Wells Fargo put forth detailed climate risk transition plans. A significant percentage of votes supported these resolutions, sometimes against management’s recommendation.

• California climate disclosure laws (2023): As the federal government has faced legal challenges to its climate disclosure rules, major investors are already operating under stricter state-level regulations. California’s laws, influenced by investor demands for more information, will require large companies to disclose greenhouse gas emissions (including Scope 3). This has a broad impact, as many institutional investors hold stakes in companies that operate in California.

Shareholder activism and strategic direction

• Southwest Airlines (2024): Following a campaign by activist investor Elliott Investment Management, Southwest Airlines agreed to add five of Elliott’s director candidates to its board. This move came after a period of poor performance and is a clear example of investors forcing board changes to address strategic and operational issues.

• M&A opposition: In 2024, institutional investors opposed several proposed mergers and acquisitions (M&A). In one instance, significant investor opposition, along with recommendations from proxy advisory firms, created enough risk and uncertainty in Frontier Communications’ acquisition by Verizon that it became a more difficult transaction.

• Boardroom battles: Activists have continued to press for board representation. In 2024, institutional investors sided with an activist group to replace the entire board of Gildan Activewear, and with another to appoint new directors at Spectral AI.

Executive compensation

• “Say on pay” votes: Institutional investors have been at the forefront of pushing for and enforcing “say on pay” measures, which give shareholders an advisory vote on executive compensation. By voting against compensation packages they deem excessive, institutions can influence a company’s pay practices

• Clawback policies: Investors have pushed for more robust compensation clawback policies that allow for the recovery of executive pay in the event of accounting fraud or material financial misstatements.

SEC enforcement actions

• Enforcing reporting requirements: In 2024, the SEC charged 11 institutional investment managers with failing to file mandatory reports on their securities holdings. This shows that regulatory bodies hold institutional investors accountable for their own governance, which is vital for maintaining market integrity and a fair marketplace.

• Whistleblower protection: The SEC’s whistleblower program, backed by institutional investors, has led to numerous enforcement actions by incentivizing individuals to report credible information about securities law violations.

Institutional Investors Securing Robust Internal Controls from Activism

Direct engagement and monitoring

• Active dialogue: They regularly meet with management and board members to discuss financial performance, risk management, and internal controls. During these discussions, they can identify weaknesses and pressure the company to adopt better practices.

• Field research: Some institutional investors conduct “field research” to assess a company’s operations, especially in relation to ESG factors. This informal external monitoring can motivate managers to improve internal controls, particularly in firms with weaker governance, to protect their reputation.

• Third-party validation: Settlements often include provisions for an independent third-party monitor or auditor to oversee changes to internal controls. Institutional investors leverage their position in class actions to secure these provisions, ensuring rigorous, external validation of control improvements.

Public pressure and proxy fights securing robust internal controls

• Credibility of analysis: Activists often present their demands in detailed white papers and public presentations that showcase extensive research and strategic analysis. This builds credibility and sways other investors, heightening the pressure on management to address their concerns, which frequently include flawed internal controls.

• Public accountability: Activism campaigns can draw significant media and public scrutiny, which threatens the professional reputation of managers and directors. The fear of reputational damage provides a powerful incentive for companies to address internal control weaknesses.

• Proxy contests: In a proxy fight, activists can nominate alternative board candidates, increasing the risk of a board change for the company. Board oversight is crucial for internal controls, and the threat of new, activist-backed directors can force companies to address the underlying issues.

Leveraging legal and regulatory frameworks

• Leading securities class actions: Large institutional investors often serve as lead plaintiffs in securities class actions, a role facilitated by the PSLRA. During settlement negotiations, they can secure non-monetary relief that includes mandatory upgrades to a company’s internal controls.

• Influencing governance rules: These investors push for governance reforms that strengthen internal controls and board oversight more broadly. For example, some have successfully campaigned for majority voting in director elections, making boards more responsive to investor concerns.

• Acting as “informal regulators”: For companies with weak internal controls, activist institutional investors can serve as informal regulators. Their engagement incentivizes managers to prioritize long-term strategy over short-term opportunism, which is a key goal of robust internal controls.

Examples of success in securing robust internal controls

• Enron and WorldCom: Following these scandals, institutional investors acted as lead plaintiffs in securities class actions that resulted in extensive governance reforms, including increased independent directors and stronger internal control oversight, secured via settlement agreements.
• ExxonMobil and Engine No. 1: Engine No. 1’s successful proxy fight installed new independent directors with climate expertise. While the focus was on climate, board composition is fundamental to internal control oversight, demonstrating how activists can use ESG arguments to effect fundamental governance change.
• Monsanto (2016): While not a direct activist campaign, the SEC enforcement action against Monsanto over inadequate internal controls was likely aided by scrutiny from institutional investors. This case resulted in an $80 million penalty and mandatory hiring of an independent compliance consultant, outcomes frequently demanded by activists.

Robust Corporate Governance Reforms Activists Push to Achieve

Board composition and oversight

• Independent directors: Activists often push for a higher percentage of independent directors to reduce conflicts of interest and ensure objective oversight of management.
• Board expertise: Activists demand that board members have relevant industry experience or financial expertise. For example, during their campaign at ExxonMobil, Engine No. 1 secured board seats for directors with renewable energy expertise.
• Separation of CEO and Chairman roles: Activists argue that combining these roles gives a single person too much power, creating a conflict of interest that hinders effective board oversight. Splitting the roles ensures the board can properly monitor and, if necessary, replace the CEO.
• Board diversity:Activists and large institutional investors push for greater board diversity in terms of skills, race, and gender. Diversity can strengthen decision-making and preempt activist arguments for change.

Executive compensation and accountability

• Pay-for-performance: Campaigns frequently highlight a misalignment between executive compensation and company performance. Activists push for compensation to be more directly tied to long-term shareholder value and performance metrics.
• Accountability for underperformance: Activists often push for CEO turnover when companies consistently underperform relative to peers. A high rate of CEO turnover has been observed at activist-targeted firms, demonstrating their influence on leadership accountability.

Shareholder rights and voting power

• Majority voting: Activists campaign for majority-vote standards in director elections, which can give “withhold” votes more power. Under plurality voting, directors can be elected even with significant opposition. Majority voting requires a board to address a lack of shareholder support.
• Elimination of staggered boards: Activists push for the elimination of staggered boards, where only a portion of the board is up for election each year. By making all directors eligible for election annually, shareholders gain more control over board composition and strategy.
• Ending “poison pills”: Activists advocate for the removal of anti-takeover defenses, like poison pills, that can stifle shareholder oversight and depress share value.

Corporate strategy and capital allocation

• Focus on core business: Activists may push for companies to divest underperforming or non-core assets to refocus on more profitable operations.
• Capital reallocation: Demands often include returning excess cash to shareholders through buybacks or dividends instead of perceived wasteful capital investment.
• Increased M&A activity: Activists may push for mergers and acquisitions (M&A) or divestitures, especially when they see a valuation gap between a company’s current and potential value.

Other Mechanisms Besides Settlements Institutional Investors Use to Foster Robust Corporate Governance

Direct engagement

• Active stewardship: This involves ongoing, behind-the-scenes communication to share perspectives, request information, and advocate for specific changes to improve company performance.

• Proactive approach: Some investors meet with management on a regular basis to build relationships and raise governance concerns before they escalate into public issues.

• Written correspondence: A shareholder can vote “no” or withhold a vote on an issue and send a letter to the company’s CEO or directors to explain their position. This is often a cheap and effective form of activism.

Leveraging voting power

• Establishing voting guidelines: Large institutional investors, such as Vanguard and BlackRock, publish detailed proxy voting guidelines that outline their expectations on everything from board independence to executive compensation.
• Voting against management: When engagement fails, institutional investors can vote against a company’s management on key issues. Voting against director nominees, for instance, sends a strong message about accountability.

• Supporting shareholder proposals: Institutional investors can support shareholder proposals, which can cover a wide range of issues, such as ESG risks, executive compensation, or political spending transparency.

Promoting transparency through proposals

• Catalyzing dialogue: Institutional investors may introduce a proposal not expecting it to pass but to pressure the company to engage in constructive dialogue and reach a compromise.

• Encouraging disclosure: Many proposals are not about specific actions but about demanding more information. For example, a proposal might call for a company to issue a report on its climate strategy or workforce diversity.

• Drawing media attention: A public proposal, especially on a controversial topic, can attract significant media coverage, increasing public scrutiny and incentivizing a company to address the issue.

Forming coalitions and collective actio

• Collaborating on campaigns: For engagement that requires a stronger push, investors may collaborate with like-minded peers through organizations like the Council of Institutional Investors (CII).

• Adopting stewardship codes: In many countries, institutional investors operate under stewardship codes, which promote active engagement and oversight of their investee companies. These codes encourage long-term value creation.
• Using proxy advisory firms: Institutional investors, especially those with large portfolios, rely on proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis to provide research and voting recommendations.

“Wall Street Walk” or divestment

• Putting pressure on share price: Substantial selling can put downward pressure on a company’s stock price, which often serves as a wake-up call to management and the board.

• Influencing passive investors: While a “walk” is an option for active investors, passive investors who cannot sell their stakes must use other stewardship tools to influence company behavior. This has led to a rise in engagement from traditionally “silent” investors.

Examples of Successful Institutional Investor Collaborations

• Collaborative efforts among institutional investors have become a powerful force for improving corporate governance, particularly on complex issues like climate change, social responsibility, and board oversight.

• By pooling resources and speaking with a unified voice, investors amplify their influence far beyond what any single institution could achieve alone.

Examples of successful collaborations

Climate Action 100+

• Participants: A global collaboration involving over 700 institutional investors representing more than $68 trillion in assets.

• Action: Investors engaged with more than 160 of the largest corporate emitters to improve their climate-related disclosures and implement robust climate transition plans.

• Outcome: Through collective engagement, the initiative has driven significant progress in corporate climate disclosures and commitments to emissions reduction, influencing companies to align with the Paris Agreement.

UN Principles for Responsible Investment (PRI)

• Participants: An international network of investors, including large asset owners and managers, committed to incorporating ESG factors into their investment and ownership decisions.

• Action: The PRI facilitates numerous collaborative engagements on topics such as human rights and social issues (e.g., the Advance initiative).

• Outcome: These collaborations, involving hundreds of investors, push companies to improve their social impact and human rights practices, particularly in high-risk sectors like metals, mining, and renewable energy.

Council of Institutional Investors (CII)

• Participants: Primarily U.S. institutional investors, including employee benefit funds, endowments, and foundations.

• Action: The CII engages in policy advocacy, including communicating with the SEC and other regulators to demand changes that protect investor interests. For example, the CII has pressed the SEC to close loopholes related to non-GAAP measures in executive compensation.

• Outcome: Through collective research and advocacy, the CII has influenced best practices and helped to shape corporate governance policies in the U.S

The Engine No. 1 and ExxonMobil proxy fight (2021)

• Participants: The hedge fund Engine No. 1 and major institutional investors, including BlackRock, Vanguard, and State Street.

• Action: Engine No. 1 built a case based on long-term financial risk, gaining the support of passive, “Big Three” investors and other institutional funds. This collective backing amplified the activist’s small stake.

• Outcome: The collaboration resulted in the election of three independent directors to ExxonMobil’s board, leading to a significant shift in the company’s climate strategy and governance.

Why these collaborations succeed

• Shared resources: Collaborations allow investors to pool resources and expertise, which is particularly beneficial when engaging on complex or technical topics.

• Amplified influence: A unified voice from a group of major investors is much more difficult for a company to ignore than a single investor’s concern.

• Legitimacy and scale: Collaborative efforts, particularly those involving large pension funds or asset managers, can give smaller investors access to significant influence and resources.

Conclusion

• In conclusion, robust corporate governance and securities litigation serve as fundamental pillars in protecting shareholder rights and maintaining the integrity of financial markets.

• The comprehensive guide titled “Robust Corporate Governance and Securities Litigation: A Complete and Instructive Guide [2025]” provides an extensive analysis of the mechanisms and strategies that can be implemented to enhance transparency, accountability, and ethical conduct within corporations.

• This guide is instrumental in understanding the intricacies of securities class actions, offering valuable insights into the legal frameworks and procedural aspects that govern these complex litigations.

• By emphasizing the importance of proactive governance practices and stringent regulatory compliance, the guide underscores the critical role these elements play in mitigating risks, preventing fraudulent activities, and safeguarding investor interests.

• Moreover, the guide address the evolving landscape of shareholder rights, elucidating how contemporary legal precedents and regulatory reforms are reshaping the dynamics between corporate entities and their stakeholders.

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• In an era where corporate malfeasance can lead to significant financial repercussions and reputational damage, this instructive guide serves as a vital resource for legal practitioners, corporate leaders, and investors alike.

• By fostering a deeper understanding of securities class actions and reinforcing the principles of robust corporate governance, it aims to cultivate a more resilient and trustworthy financial ecosystem.

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