The Irrelevance of Delaware Corporate Law

Robert J. Rhee is John H. and Marylou Dasburg Professor of Law at the University of Florida Levin College of Law. This post is based on his recent paper, forthcoming in the Journal of Corporation Law, and is part of the Delaware law series; links to other posts in the series are available here.

Is Delaware corporate law relevant? Relevance is a relational concept. Relevant to what? Rules of corporate law are considered in efficiency’s light. Efficient laws should enhance firm value. Is Delaware law more efficient than the laws of other states such that we should see a “Delaware premium”? Do inter-state differences in corporate law matter?

The idea of a “race” for quality has commanded the attention of scholars since the Cary–Winter debate. It is central to the question of federalism in corporate law. The advocates of Delaware law accept the view that it represents the product of a race to the top. But suppose the “race” is a figment of our theoretical imagination. Suppose there is no evidence of a Delaware valuation premium. If so, under the generally accepted measure of quality (efficiency and firm value), corporate law would be irrelevant. A much smaller camp in the academic debate has argued that corporate law is “trivial.” In The Irrelevance of Delaware Corporate Law, 48 J. Corp. L. (forthcoming 2022), I provide empirical support for the hypothesis that, despite the law’s purported aspiration for efficiency, inter-state differences in state corporate law have no basis in efficiency.

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Weekly Roundup: September 23-29, 2022


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This roundup contains a collection of the posts published on the Forum during the week of September 23-29, 2022.

Boards Need More Women: Here’s How to Get There


How Compensation Decisions Support CEO Succession



Battle for Our Souls: A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct



Empowering Corporate Compliance Functions in a Post-Pandemic Environment


Making it Count: Accountability is Needed to Fast-Track DE&I


The Market for Corporate Criminals


Clawback Policies: Evolving Market Norms and SEC Rules


Planning for Tomorrow’s Public Company CFO



5 Factors Impacting Activists’ Declining Success Rate

Kurt Moeller is a Managing Director at FTI Consulting Inc. This post is based on his FTI memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

In the 2021 and 2022 proxy seasons, shareholder activists taking proxy contests all the way to a vote have won at least one board seat far less often than during the previous four years. Why is this the case? One reason is that influential proxy advisors Institutional Shareholder Services (“ISS”) and Glass Lewis (“Glass Lewis”) each have been much less likely to recommend that shareholders vote for the activist slate. This shift by ISS and Glass Lewis appears partly due to broad macro factors. At the same time, those proxy advisors’ recommendations have offered specific critiques of activists’ campaigns that suggest how activists can alter their approaches to achieve more success.

FTI Consulting examined proxy contests in which the underlying campaign sought board seats at U.S. companies with market capitalizations of at least $100 million and where ISS and Glass Lewis published voting recommendations. From 2017 through 2021, each year saw between 12 and 15 such proxy contests; the first half of 2022 had 14 contests. While small sample sizes in any year can magnify differences in results, a longer-term look suggests a definite trend.

From 2017 through 2020, activists won at least one board seat in 57% of these contests. That figure falls to 23% since January 1, 2021, including 29% during the first half of 2022. From 2017 through 2020, ISS and Glass Lewis both recommended that shareholders vote on the activist proxy card in 59% of situations, a figure which has plunged to 23% since 2021 began.

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Planning for Tomorrow’s Public Company CFO

Linda Barham, Nicole Salama, and Esmerelda Popo are consultants at Russell Reynolds Associates. This post is based on an RRA memorandum by Ms. Barham, Ms. Salama, Ms. Popo, and Catherine Schroeder.

Over the past decade, the public company CFO remit has rapidly evolved beyond the traditional financial scope to include operational and strategic responsibilities. To stay abreast and develop your finance talent as the role continues to evolve, understanding tomorrow’s CFO is paramount.

To better understand the current state of the role and hiring implications, Russell Reynolds Associates recently analyzed the backgrounds, career paths, and tenures of S&P 500 CFOs (N = 500). [1] Based on our findings, we identify three important trends in how CFO appointments have evolved over the years, as the war for talent continues.

  1. High turnover leads to an extremely active market
  2. Recent strides have been made in promoting women CFOs
  3. The S&P 500 landscape is shifting towards strategically-oriented CFOs

Finally, we also review key considerations for CEOs, Boards, and CFOs as they continue to hire and develop their finance talent.

1. An active CFO market has companies forgoing traditional requirements

Over half of S&P 500 CFOs were hired into their role within the past three years. This high churn rate is the result of many factors, including a frothy IPO market in 2021 that significantly increased the number of public company CFO opportunities, as well as overall strong equity performance that allowed some to retire earlier. [2] While recent market slowdowns have slightly cooled the war for talent, increasing retirement rates and the ongoing search for talent from historically unrepresented minority groups, point to a CFO market that is far from stagnant [3] (To read more about CFO turnover in 2022, see our latest research.)

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Clawback Policies: Evolving Market Norms and SEC Rules

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS Corporate Solutions publication by Jun Frank, Managing Director, Advisory, and Paul Hodgson, Senior Editor, at ISS Corporate Solutions.

Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse M. Fried.

Key Takeaways

  • SEC expected to release revised rules on clawback policies in October
  • Comments focused on how to categorize restatements based on impact
  • Clawback policies are already the market norm in most industries
  • Health Care has one of the lowest adoption rates for clawback policies
  • New rules may prompt companies to re-examine the scope of their policies

The Securities and Exchange Commission is poised to revise its rules on so-called clawbacks: the process of recovering incentive compensation from current and former executives when a company is forced to make a material restatement of its accounts. With a target of releasing its revisions in October, the SEC has twice reopened public comment periods on proposals that it first advanced in 2015 to implement part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulator also added 10 new policy questions along with a memorandum that addressed two matters: the voluntary adoption of clawback policies by companies and whether clawbacks should apply to restatements of lesser significance, known as “little r,” as well as those that have a meaningful material impact “Big R.”

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The Market for Corporate Criminals

Andrew Jennings is an Assistant Professor of Law at Brooklyn Law School. This post is based on his recent paper, forthcoming in the Yale Journal on Regulation.

There’s a problem at the intersection of M&A and corporate crime. The problem arises from buyers’ acquisition of not just targets’ private assets and liabilities but also their criminal and regulatory (i.e., quasi-criminal) liabilities. That is, if A commits a criminal offense, and if B acquires A, B is liable for A’s offense despite being uninvolved in its commission. In the case of tort or contract claims, successor liability can be justified as preventing firms from evading private obligations through restructuring. In arm’s-length transactions, buyers can manage private successor liability through contractual terms that reallocate those costs and risks onto sellers. In the case of successor liability for criminal offenses, however, the serious non-financial consequences of criminal conviction (or even potential conviction) cannot be neatly managed through contractual risk allocation. Instead, distinctive consequences of criminal liability could frighten potential buyers away from otherwise-attractive deals. The result would be a suboptimal level of M&A activity: firms that would be ideal targets for acquisition but for their criminal exposure might sell for less efficient prices or to less efficient buyers, or they might not sell at all. As a result, this problem could represent social cost in that one of corporate law’s key mechanisms for addressing business deficiencies—the market for corporate control—might fail when the deficiency in question is a culture of lawbreaking.

The acquisition of Bankrate—a once-public financial firm—by Red Ventures—a private marketing company—is an instructive example. In 2012, the SEC raised concerns with Bankrate about its financial reporting, leading to the discovery that its CFO had engaged in a form of securities fraud known as a cookie-jar accounting. In 2017, Red Ventures, although it was aware of the accounting issues, bought Bankrate for approximately $1.4 billion. The investigation continued and later that year Red Ventures and the DOJ entered into a non-prosecution agreement (NPA). Under the NPA, the DOJ acknowledged that “Red Ventures acquired Bankrate, Inc. after the criminal conduct had taken place and had been investigated by the government, and Red Ventures had no involvement in any of the misconduct . . .”. Nevertheless, Red Ventures “admit[ted], accept[ed], and acknowledge[d] that it [wa]s responsible under United States law for the acts of [Bankrate’s former] officers, directors, employees, and agents” in connection with the old CFO’s fraud.

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Making it Count: Accountability is Needed to Fast-Track DE&I

Tina Shah Paikeday is the Global Head of the Diversity, Equity & Inclusion Practice at Russell Reynolds Associates. This post is based on an RRA memorandum by Ms. Paikeday, Nisa Qosja, and Jemi Crookes. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

Although efforts to improve diversity, inclusion, and equity (DE&I) of employees and leaders in organizations continue, the number of organizations tangibly tracking accountability for the outcome of those efforts is still relatively low.

Russell Reynolds Associates’ 2022 Global Leadership Monitor research identified that just 17% of global leaders we surveyed said executives at their organizations are compensated on DE&I outcomes. Even against a benchmark that low, there is no single industry or region leading the way on DE&I accountability. The Technology industry lags notably behind.

Without accountability metrics, it’s virtually impossible for organizations to measure their leaderships’ performance against DE&I objectives and to compensate them accordingly, as they would with other measures of business performance. As many research studies show the link between DE&I and organizational performance, DE&I metrics should be included more widely as a component of compensation-based accountability models.

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Empowering Corporate Compliance Functions in a Post-Pandemic Environment

Erin Brown Jones and Christopher D. Frey are Partners, and Katherine A. Sawyer is Counsel at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Jones, Mr. Frey, Ms. Sawyer, Mr. Seltzer, Ms. Rizzoni and Ms. Burgoyne.

The US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) have issued a number of policy updates and public pronouncements over the last several months, emphasizing the importance of empowered and accountable corporate compliance programs. US regulators clearly expect compliance programs to be empowered with sufficient resources, personnel, stature, and authority within their organizations to be effective, and they are looking to hold chief compliance officers (CCOs), so-called gatekeepers, and individual bad actors accountable for corporate compliance.

This post provides practical guidance for companies seeking to ensure that their compliance teams are empowered and accountable, particularly in the post-pandemic environment, which presents unique challenges for organizations seeking to build a best-in-class compliance program. These recommendations include the following:

  1. Re-evaluate corporate compliance risks
  2. Address not just new risks, but also new business realities in the compliance program
  3. Ensure compliance has the resources to do its job
  4. Ensure compliance has the opportunity and ability to do its job
  5. Use technology as a force multiplier for compliance
  6. Do the hard work of evaluating the effectiveness of the compliance program
  7. Focus on training gatekeepers and middle management
  8. Ensure the whistleblower hotline is working effectively

Not all of the tips in this post may be relevant to or necessary for all companies. However, in light of the aggressive enforcement posture that US regulators [1] have taken, their increasingly rigorous assessments of compliance programs, and the clear statements from the DOJ and the SEC about individual accountability and the importance of ensuring that corporate compliance programs are empowered and accountable, companies have real incentives to review and, if appropriate, enhance their existing compliance programs.

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How Boards Can Assess the Potential and Readiness of Future CEOs

Justus O’Brien co-leads the Board & CEO Advisory Partners Practice at Russell Reynolds Associates. This post is based on an RRA memorandum by Mr. O’Brien, Paul Ballman, Erin Zolna, and Aimee Williamson.

CEO succession planning works best when it’s a continuous process that constantly replenishes your pipeline of future leaders. And that means you need to start it early. In fact, the board should start planning for the next CEO from the first day a new one steps into the job.

From day one, you need to define what you want in your next CEO, find who in your organization has the potential to get there, and outline how you’ll develop those skills in the coming years. And, when it comes time to choose a successor, you’ll need to accurately assess your candidates to choose the right leader.

The question is, how do you start so early?

How do you define the skills your CEO will need years in advance? How do you find high-potential candidates? And how do you nurture them to ensure they’re ready to step up when the time comes?

Define what you need in a CEO

Great CEO succession starts with a success profile—a documented view of what your organization needs in its next CEO. While it’s difficult to predict the critical requirements for your next CEO five or six years in advance, a success profile will help you think about future needs systematically and align the board early in the process.

The board is solely responsible for appointing the CEO, so members need to discuss the success profile in detail. Unless the board defines and aligns to a robust success profile, you’ll be flying blind as you develop and choose your next CEO.

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Battle for Our Souls: A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct

Jennifer Arlen and Lewis A. Kornhauser are both Professors of Law at New York University School of Law. This post is based on their recent paper, forthcoming in the The University of Illinois Law Review.

We develop a framework based on empirical evidence that identifies the optimal structure of corporate and individual liability when laws can deter through their ability to express social condemnation as well as through formal sanctions. We show that corporate liability is vital to the law’s ability to deter individuals from engaging in organizational misconduct through expressive channels. We also show that, in order to deter through either channel, governments must ensure that they reliably detect and sanction most individuals and companies who commit crime. Finally, we show why countries should not exempt companies from corporate liability based on their adoption of an ostensibly effective compliance program.

From Classical Deterrence Theory to Evidence-Based Deterrence Theory

Anyone seeking to determine how the law can deter misconduct must employ a framework that makes assumptions about four features of individual decision-making: (1) individuals’ central motivations; (2) how the law influences choices; (3) how people make decisions; and (4) how institutions, such as companies, affect people’s choices.

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