Monthly Archives: July 2016

SEC Approval of Nasdaq Rule Requiring “Golden Leash” Disclosure

Posted by Avrohom J. Kess and Yafit Cohn, Simpson Thacher & Bartlett LLP, on
Wednesday, July 27, 2016
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Avrohom J. Kess is partner and head of the Public Company Advisory Practice and Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Kess and Ms. Cohn. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang; Servants of Two Masters? The Feigned Hysteria Over Activist-Paid Directors, by Yaron Nili (discussed on the Forum here); and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

On July 1, 2016, the Securities and Exchange Commission (“SEC”) approved a proposed rule filed by Nasdaq, as amended by Nasdaq on June 30, 2016, which would require listed companies to disclose annually any compensation or other payment provided by a third party to the company’s directors or director nominees in connection with their candidacy for or service on the company’s board of directors. [1] While recognizing that “there may be some overlap” with the SEC’s disclosure requirements, the SEC approved Nasdaq’s proposed rule change on an accelerated basis. [2] The rule will be effective July 31, 2016, though interested persons may comment on the rule change through July 28, 2016. [3]

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Commonsense Governance Principles: Returning Governance to its “Commonsense” Roots

Posted by Michael W. Peregrine, McDermott Will & Emery LLP, on
Wednesday, July 27, 2016
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Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; his views do not necessarily reflect the views of McDermott Will & Emery or its clients. The Commonsense Governance Principles are available here.

The new “Commonsense Principles of Corporate Governance” (“the Principles”) are a welcome and thoughtful contribution to corporate governance discourse.

Released on July 21, the Principles consist of a series of “commonsense” recommendations and guidelines concerning the roles and responsibilities of boards, companies and shareholders. They are intended to provide a basic framework for sound, long-term-oriented governance and, as such, are responsive to a growing desire across commercial interests for greater clarity in leading boardroom challenges.
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Do Independent Directors Face Incentives to Monitor Executives?

Posted by Quinn Curtis, University of Virginia School of Law, on
Wednesday, July 27, 2016
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Quinn Curtis is Associate Professor at University of Virginia School of Law. This post is based on a recent paper authored by Professor Curtis and Justin J. Hopkins, Assistant Professor at University of Virginia Darden Graduate School of Business Administration.

Corporate directors who suspect malfeasance by managers may face conflicting incentives. On the one hand, encouraging transparency and demonstrating diligence by pressing for the investigation and disclosure of problems might be rewarded with re-election, appointment to seats on other boards, and greater shareholder support. On the other hand, revealing misconduct could draw negative attention to the company and result in worse career outcomes for directors. In Do Independent Directors Face Incentives to Monitor Executives? we empirically examine whether directors who publicly demonstrate diligent monitoring are rewarded. Our findings cast doubt on whether directors face strong incentives to monitor. Instead, our results suggest that directors sometimes benefit from looking the other way when they suspect problems.

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2016 Proxy Season Review

Posted by Glen T. Schleyer, Sullivan & Cromwell LLP, on
Tuesday, July 26, 2016
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Glen T. Schleyer is a partner in the New York office of Sullivan & Cromwell LLP. This post is based on the executive summary of a Sullivan & Cromwell publication by Mr. Schleyer, Janet Geldzahler, H. Rodgin Cohen and Heather Coleman.

This post summarizes significant developments relating to the 2016 U.S. annual meeting proxy season, including:

  • Proxy Access Proposals Continue to Drive Changes. The dominant trend in Rule 14a-8 shareholder proposals and corporate governance actions in 2016 related to proxy access. A record number of proxy access proposals were made for the 2016 proxy season (around 200 in total), and many companies responded by adopting proxy access bylaws with terms similar to the proposal, resulting in a slight decline in proposals actually voted on. Around 190 of the S&P 500 companies have now adopted proxy access.

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Chairman and CEO: The Controversy over Board Leadership

Posted by David F. Larcker & Brian Tayan, Stanford University, on
Tuesday, July 26, 2016
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David Larcker is Professor of Accounting at Stanford Graduate School of Business. This post is based on a paper authored by Professor Larcker and Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business.

Our paper, Chairman and CEO: The Controversy over Board Leadership, examines the circumstances under which companies decide to combine or separate the chairman and CEO roles and shareholder response to this decision.

In recent years, companies have consistently moved toward separating the chairman and CEO roles. According to Spencer Stuart, just over half of companies in the S&P 500 Index are led by a dual chairman/CEO, down from 77 percent 15 years ago. In theory, an independent chairman improves the ability of the board of directors to oversee management. However, separation of the chairman and CEO roles is not unambiguously positive, and there is little research support for requiring a separation of these roles. Still, shareholder activists and many governance experts remain active in pressuring companies to divide their leadership structure.

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How Do Investors Accumulate Network Capital? Evidence from Angel Networks

Posted by Vijay Yerramilli, University of Houston Bauer College of Business, on
Tuesday, July 26, 2016
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Vijay Yerramilli is Assistant Professor of Finance at University of Houston Bauer College of Business. This post is based on a recent paper authored by Professor Yerramilli and Buvaneshwaran Gokul Venugopal.

Networks are widespread in many financial markets, and play a crucial role in the transmission of information and mitigation of agency conflicts. In the context of entrepreneurial finance, Hochberg, Ljungqvist, and Lu (2007) show that venture capital (VC) funds with higher network centrality (i.e., better-networked VC funds) deliver better future performance, in terms of the proportion of their portfolio investments that successfully exit through an IPO or sale to another company. However, we know little about how networks are formed or how some investors end up becoming central to their networks. Is network centrality itself determined by reputation gained from good past performance? Do social connections translate into future co-investment connections? Addressing these questions is challenging because most financial markets are dominated by a few large institutions that became big via a series of consolidations, which makes it impossible to examine how their networks developed over time. Moreover, since individuals often move across institutions, the true relationship between individual performance and network connectedness may not be reflected in institution-level metrics of performance and network connectedness.

In our paper, How do Investors Accumulate Network Capital? Evidence from Angel Networks, which was recently made available on SSRN, we overcome these challenges by using the angel investor market to understand how investors accumulate network capital. This market provides an ideal setting because it allows us to focus on individual investors, and to examine how their position in the network changes over time with their performance. This is crucial because, unlike institutional investors such as VC funds or private equity groups, individual angels are not endowed with large network capital to begin with, and have to build their connections from the ground up. Given the high failure rate of start-ups, we can expect that angels who successfully guide their portfolio companies to the next stage of financing will subsequently become more important within their networks.

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Delaware Court on LLC Managers’ Authority to Delegate

Posted by David A. Harris, Morris, Nichols, Arsht & Tunnell LLP, on
Monday, July 25, 2016
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David A. Harris is a partner in the Commercial Law Counseling Group at Morris, Nichols, Arsht & Tunnell LLP. This post is based on a Morris Nichols publication by Mr. Harris, Tarik J. Haskins, Louis G. Hering, R. Jason Russell, and Walter C. Tuthill. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently issued an important opinion addressing the ability of managers of a limited liability company to delegate to non-managers. Obeid v. Hogan. CA. No. 11900-VCL (Del. Ch. Jun. 10, 2016). In Obeid, the plaintiff was a member and director of a board-managed LLC (the “Corporate LLC”) and a member and manager of a manager-managed LLC (the “Manager LLC” and, together with the Corporate LLC, the “LLCs”). The plaintiff sued the other directors and managers of the LLCs directly and derivatively on behalf of the LLCs. The other directors and managers then voted to create a special litigation committee (the “SLC”) for each LLC, which SLC was comprised of an individual who was neither a director of the Corporate LLC nor a manager of the Manager LLC, to determine whether to pursue the derivative actions on behalf of the LLCs. The plaintiff brought this action challenging whether a non-director or non-manager could serve on the SLC.

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Regulating Corporate Governance in the Public Interest: The Case of Systemic Risk

Posted by Steven L. Schwarcz, Duke University School of Law, on
Monday, July 25, 2016
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Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at the Duke University School of Law. This post is based a recent keynote address by Professor Schwarcz at the National Business Law Scholars Conference (NBLSC).

There’s long been a debate whether corporate governance law should require some duty to the public. The accepted wisdom is not to require such a duty—that corporate profit maximization provides jobs and other public benefits that exceed any harm. This is especially true, the argument goes, because imposing specific regulatory requirements and making certain actions illegal or tortious—what I’ll call “regulating substance,” in contrast to “regulating governance”—can mitigate the harm without unduly impairing corporate wealth production.

Whether that’s true in other contexts, I question if it’s true in the context of systemic economic harm. My examination is based in part on a forthcoming article [1] and also parallels the efforts of a Working Group (which I chair) of Fellows of the American College of Bankruptcy, which is examining the same question under the laws of various nations worldwide.

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Shareholder Activism on Sustainability Issues

Posted by George Serafeim, Harvard Business School, on
Monday, July 25, 2016
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George Serafeim is the Jakurski Family Associate Professor of Business Administration at Harvard Business School. This post is based on a recent paper by Professor Serafeim, Jody Grewal and Aaron Yoon.

A growing number of investors are now engaging companies on environmental, social and governance (ESG) issues, in addition to traditional executive compensation, shareholder rights, and board of directors’ topics. In 2013, nearly 40 percent of all shareholder proposals submitted to Russell 3000 companies related to ESG issues, representing a 60 percent increase since 2003 (Proxy Voting Analytics, 2014). The topics of ESG proposals are diverse, ranging from disclosure of political contributions and compliance with human rights policies, to the adoption of a climate change policy. The purpose of this paper is to test the effect that ESG proposals have on firms’ subsequent ESG performance and market valuation. Critically, we use recent innovations in accounting standard setting to classify shareholder proposals that address ESG issues as financially material or immaterial, and we analyze how proposals on material versus immaterial issues affect firms’ subsequent performance on the focal ESG issue and market valuation.

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Present at the Creation: Reflections on the Early Years of the NACD

Posted by Lawrence J. Trautman, Western Carolina University, on
Sunday, July 24, 2016
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Lawrence J. Trautman is Assistant Professor of Business Law and Ethics at Western Carolina University and  a past president of the New York and Metropolitan Washington/Baltimore Chapters of the National Association of Corporate Directors. This post is based on a recent paper authored by Mr. Trautman.

Effective corporate governance is critical to the productive operation of the global economy and preservation of our way of life. Excellent governance execution is also required to achieve economic growth and robust job creation. In the United States, the premier corporate director membership organization is the National Association of Corporate Directors (NACD). NACD plays a major role in fostering excellence in corporate governance in the United States and beyond.

The NACD has grown from a mere realization of the importance of corporate governance to become the only major national membership organization created by and for corporate directors. With a membership in excess of 17,000, today’s NACD is a reliable source of essential resources that assist board directors in strengthening board leadership. Now a member of the Global Network of Director Institutions (GNDI.org), NACD has worldwide impact. Even during the early years, NACD was a significant source of quality education and qualified directors to companies striving to achieve excellence in corporate governance.

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