Bringing the #MeToo Movement into the Boardroom

Maintaining a workplace environment free of discrimination, sexual harassment and other misconduct is critical to both the short-term productivity and long-term health of a business. Reports of sexual harassment allegations at public corporations can have material negative effects on stock price, with some corporations seeing double digit single day drops after accusations are made public. As we have written elsewhere, the primary obligation to manage these risks on a day-to-day basis falls to executive leadership. [1] But the #MeToo movement also has raised questions about the role of boards of directors to provide oversight of management and, to the extent that senior management may be a source of the problem, the board’s obligation to take more direct action.

This post discusses some key issues for General Counsel to consider as they advise corporate boards about how to navigate their responsibilities in this environment.


Collateral Damage

Gary B. Gorton is Frederick Frank Class of 1954 Professor of Finance and Toomas Laarits is a PhD Candidate at Yale School of Management. This post is based on their recent paper.

In a classic banking panic, holders of demand deposits want their cash back because they do not trust the value of the banks’ loan portfolios backing the deposits. Deposit insurance solves this problem. A banking panic in the current financial system is different. In the crisis of 2007-8 the holders of short-term debt, in the form of repo, came to distrust the bonds used as collateral and increased haircuts, generating a run on the banking system (see Gorton and Metrick (2012) and Gorton, Laarits, and Metrick (2017)). Have the many post-crisis legal and regulatory changes mitigated this problem? Or, have they instead exacerbated the shortage of good collateral, resulting in collateral damage?


Director Abstention as Material Information

Steven M. Haas is a partner at Hunton & Williams LLP. This post is based on a Hunton & Williams publication by Mr. Haas, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently held that the reason a company’s founder and chairman had abstained on a vote to approve a merger was material information that should have been disclosed to the company’s stockholders. The court said that the abstaining director’s view that it was an inopportune time to sell the company and that mismanagement had negatively affected the sale process would be important to an investor who was considering the board of directors’ recommendation in favor of the transaction.


Corporate Governance: On the Front Line of America’s Cyber War

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Jackson’s recent remarks at the Tulane Corporate Law Institute, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you so much, David, for that kind introduction. [1] It’s great to be here at the Tulane Corporate Law Institute for what, I know, is one of the most highly-anticipated corporate-law conferences of the year. It also doesn’t hurt that it happens to be in New Orleans. [2]

Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s Staff. And let me add my own standard caveat: I hope someday to persuade my colleagues of the utter, absolute, and obvious correctness of my views.


A Regulatory Framework for Exchange-Traded Funds

Henry T. C. Hu is the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School and John D. Morley is Professor of Law at Yale Law School of Law. This post is based on their recent article, forthcoming in Southern California Law Review.

The “exchange-traded fund” (ETF) is one of the key financial innovations of the modern era. Our article, A Regulatory Framework for Exchange-Traded Funds (forthcoming in Southern California Law Review, vol. 91, no. 5, 2018), is the first academic work to show the need for, or to offer a regulatory framework for ETFs.


Risk Management and the Board of Directors

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz, focusing on rapid response shareholder activism and preparedness, takeover defense and corporate governance; and Marshall L. Miller is is of counsel in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Lipton, Mr. Niles, Mr. Marshall, Daniel A. NeffSteven A. Rosenblum, and Andrew R. Brownstein.

I. Introduction


The past year has seen continued evolution in the political, legal and economic arenas as technological change accelerates. Innovation, new business models, dealmaking and rapidly evolving technologies are transforming competitive and industry landscapes and impacting companies’ strategic plans and prospects for sustainable, long-term value creation. Tax reform has created new opportunities and challenges for companies too. Meanwhile, the severe consequences that can flow from misconduct within an organization serve as a reminder that corporate operations are fraught with risk. Social and environmental issues, including heightened focus on income inequality and economic disparities, scrutiny of sexual misconduct issues and evolving views on climate change and natural disasters, have taken on a new salience in the public sphere, requiring companies to exercise utmost care to address legitimate issues and avoid public relations crises and liability.


Are Buybacks Really Shortchanging Investment?

Jesse Fried is the Dane Professor of Law at Harvard Law School and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration. This post is based on a recent article authored by Professor Fried and Professor Wang, recently published in the Harvard Business Review.

In an article recently published in the Harvard Business Review, Are Buybacks Really Shortchanging Investment?, Charles Wang and I use data to challenge the widely-held view that U.S. firms distribute too much cash to shareholders through stock buybacks and dividends, reducing these firms’ ability to innovate and invest for the long term.

Payout critics focus on the high volume of dividends and repurchases, often pointing to shareholder payouts routinely exceeding 90% of net income. For example, during the decade 2007-2016, S&P 500 firms distributed $7 trillion to shareholders, mostly via repurchases, totalling 96% of net income. These figures have led Larry Fink, CEO of Blackrock, to warn corporate leaders against seeking to “deliver immediate returns to shareholders, such as buy-backs… while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.” Vice-President Joseph Biden, reportedly mulling a run at the White House in 2020, claimed that the high level of buybacks “has led to significant decline in business investment” with “most of the harm …borne by workers.” Biden’s view is widely shared by prominent politicians in Washington, D.C. Just last week, Senate Democratic Leader Chuck Schumer, who claims buybacks “crowd out investment” that would benefit workers and firms, joined Senator Tammy Baldwin in introducing an amendment to the banking deregulation bill that gives the SEC the authority to block a stock buyback it deems to harm the corporation.


A Comparative Perspective on Regulation Versus Litigation in Corporate Law

Sean J. Griffith is T.J. Maloney Chair and Professor of Law and Director of the Corporate Law Center at Fordham Law School; Dan Awrey is a Professor of Financial Regulation at University of Oxford Faculty of Law; and Blanaid Clarke is McCann Fitzgerald Chair in Corporate Law at Trinity College Dublin. This post is based on their recent article, published in the Yale Journal on Regulation.

Regulation by litigation has been the dominant regulatory modality in U.S. corporate law for over a century. But that model is in crisis. The shareholder suit, the trigger of the state law-dominated, fiduciary duty-based model of regulation, has been drawn into disrepute. The crisis is most apparent in merger suits, which have been brought against virtually every deal, but which invariably generate no real benefit for anyone other than the lawyers that file and defend them. Delaware, the leading regulator in U.S. corporate law, has recently taken steps to address the problem, but the immediate result seems to have been a flood of litigation out of Delaware and into other fora. Regulation by litigation thus has demonstrated a tendency to devolve into rent seeking by attorneys.


The Appraisal of AOL, Inc.

Scott A. Barshay is a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Barshay, Matt Abbott, Ross Fieldston, and Justin Hamill, and is part of the Delaware law series; links to other posts in the series are available here.

Recently in In re Appraisal of AOL Inc., the Delaware Court of Chancery, in an opinion by Vice Chancellor Glasscock, relied solely on its own discounted cash flow (“DCF”) analysis to appraise the fair value of AOL Inc. below the deal price paid in its acquisition by Verizon Communications Inc. While reiterating that deal price is the best evidence of fair value, and must be taken into account, when appraising “Dell‑compliant” transactions (i.e., those where “(i) information was sufficiently disseminated to potential bidders, so that (ii) an informed sale could take place, (iii) without undue impediments imposed by the deal structure itself”), the court held this was not such a transaction. The court found that certain of the deal protections combined with informational disparities between potential bidders and certain actions of the parties were preclusive to other bidders, and therefore, the court assigned no weight to deal price in its fair value determination. Applying its own DCF analysis, the court ultimately determined fair value to be approximately 3% lower than the deal price (possibly due to synergies), thus continuing a string of recent appraisal decisions finding fair value at or below deal price.


Do CEO Paycuts Really Work?

Gerald J. Lobo is Arthur Andersen Chair in Accounting at University of Houston C. T. Bauer College of Business; Hariom Manchiraju is Assistant Professor of Accounting at Indian School of Business; and Sri S. Sridharan is John and Norma Darling Distinguished Professor in Financial Accounting at Northwestern University Kellogg School of Management. This post is based on their recent article, forthcoming in the Journal of Accounting and Public Policy. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Boards of directors (boards) often cut CEO pay following poor performance. These paycuts can go beyond the general pay-for-performance relation. Agency theory suggests that such paycuts can act as a disciplining mechanism against the CEO and, therefore, can lead to better performance in subsequent periods. Consistent with this line of reasoning, there is some empirical evidence that firm performance improves following a CEO paycut.

In our article, Accounting and Economic Consequences of CEO Paycuts, forthcoming in the Journal of Accounting and Public Policy, we examine the possibility that cutting the pay of an incumbent CEO might also induce an adverse response. Specifically, we examine whether, in response to paycuts, CEOs actually increase their efforts to improve the underlying economic performance of the firm, or simply resort to managing measured performance through activities such as accruals manipulation and real activities management. These latter activities may be designed to boost reported earnings in the short-run at the expense of long-term shareholder value. Since CEO pay is often linked to reported earnings performance, CEOs have incentives to engage in earnings management after a paycut because such activities can lead to faster improvement in reported performance and, hence, to speedier restoration of their pay to prior levels. Thus, the efficacy of a CEO paycut as a disciplining mechanism is unclear.


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