Monthly Archives: October 2016

Universal Proxies

Scott Hirst is a Lecturer on Law at Harvard Law School and Associate Director of the Harvard Law School Program on Corporate Governance. This post is based on a recent paper by Dr. Hirst, which was also described in a recent Wall Street Journal article.

The Securities and Exchange Commission is expected to soon propose a rule regarding universal proxies. At the urging of investors groups, SEC Chair Mary Jo White has made a universal proxy rule an objective of her tenure. But a rider to a spending bill passed by the House and pending in the Senate intends to prevent a universal proxy rule, on the basis that it might increase the frequency of proxy fights and empower special interests. The debate between these positions has so far proceeded despite a dearth of evidence.

In my paper, Universal Proxies, which was described in a recent Wall Street Journal article, I provide the first economic and empirical analysis of universal proxies. I show that the current system, whereby shareholders vote by unilateral proxies, can create distortions which disenfranchise shareholders. 22% of proxy contests at large U.S. corporations between 2008 and 2015 may have had distorted outcomes that could be prevented by a universal proxy rule. Contrary to concerns raised by its opponents, a universal proxy rule is unlikely to lead to more proxy contests, or to greater success for special interest groups. The significant benefits of universal proxies in eliminating distorted proxy contests outweigh these perceived costs, and would enfranchise shareholders.

The Legal and Regulatory Requirements of Executive Compensation

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP and Arthur H. Kohn is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a co-publication from PwC and Cleary Gottlieb Steen & Hamilton LLP. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.

More and more, we are seeing boards engage with shareholders and other stakeholders about executive compensation. But what has motivated this new attitude? We take a closer look at the drivers behind it, including provisions of the Dodd-Frank Act, the role of proxy advisors and shareholder pressure, and offer advice on how boards can do a better job of talking to shareholders and other stakeholders about the issue.


Culpable Participation in Fiduciary Breach

Deborah DeMott is David F. Cavers Professor of Law at Duke Law School. This post is based on a forthcoming article by Professor DeMott. This post is part of the Delaware law series; links to other posts in the series are available here.

To instigate a fiduciary’s breach of duty or otherwise participate in that breach constitutes a tort when the action is done purposefully or knowingly and causes injury to the beneficiary of the fiduciary duty. This proposition of accessory liability is well settled in tort doctrine but not prominent in prior scholarship in the United States. To some observers, it was jarring when this component of tort doctrine was applied in recent years to investment bankers who serve as advisors to target boards in M&A transactions. In particular, the tort became newly prominent when the Delaware Supreme Court underlined its potential impact in late 2015 by affirming a $76 million judgment against an M&A advisor in RBC Capital Markets v. Jervis, an action brought by the target’s former shareholders. In my article I explicate the elements of the tort and situate it within the broader landscape of contemporary tort law. From this perspective, the outcome in RBC Capital Markets stems from the application of settled law, not doctrinal innovation. Nor is it novel that the culpability of a target’s directors, premised on gross negligence, is not identical to the advisor’s stance as an intentional tortfeasor. Likewise, it is not novel that an accessory’s liability does not depend on whether the primary wrongdoer will be liable for money damages, as corporate directors typically are not when their conduct amounts to no more than gross negligence.


Can Business Help Fix Our Broken Politics?

Ben W. Heineman, Jr. is former GE General Counsel and is a senior fellow at Harvard Law School and Harvard Kennedy School of Government. He is author of the new book, The Inside Counsel Revolution: Resolving the Partner-Guardian Tension (Ankerwycke 2016), as well as High Performance with High Integrity (Harvard Business Press 2008).

Many business people are appalled at the current state of our politics. Few, however, would admit that the “business community” is responsible, in part, for our dysfunctional political culture. And fewer yet may be prepared to think about how business can take steps—in concert with other political actors—to help soothe the distemper.

But, this dreary campaign season is a good time for corporate leaders to consider specific changes in political processes—less money, more disclosure, fair facts, balanced proposals, broad coalitions, cooler rhetoric, bi-partisanship—which could help fix our broken politics and rehabilitate business’s own political standing. Such process changes proceed from an understanding that there will always be significant substantive policy differences about societal problems but that those differences require a national politics that promotes common sense, civility and compromise to move the country forward, as has happened before in our history.

First a brief background sketch on the sorry state of our current political discourse.


Are Friday Announcements Special? Overcoming Selection Bias

Alexander Vedrashko is Associate Professor of Finance at the Beedie School of Business at Simon Fraser University. This post is based on a forthcoming article by Professor Vedrashko; Roni Michaely, Rudd Family Professor of Management at the Johnson Graduate School of Management at Cornell University; and Amir Rubin, Associate Professor of Finance at the Beedie School of Business at Simon Fraser University.

One striking behavioral regularity often cited as evidence of behavioral biases in the market is investors’ inattention on Fridays. This regularity is explained using the intuition that on Fridays, investors and traders could be preoccupied with the upcoming weekend and, thus, pay less attention to corporate news announcements on that day. Studies investigating this issue reported reduced response to earnings announcements (DellaVigna and Pollet, 2009) and merger announcements (Louis and Sun, 2010) on Fridays.

In our article we show that this pattern in investor behavior on Fridays appears to extend to corporate news events other than earnings and merger announcements. We find a reduced reaction to announcements of dividend changes, repurchases, and seasoned equity offerings (SEOs) on Fridays. Taken at face value, these combined results could present comprehensive and persuasive evidence that investors underreact to events occurring in the market on Fridays, which is consistent with inattention on these days. However, we show it is not investors’ inattention but rather selection bias that is the reason for the findings of reduced reaction on Fridays. We conclude that while various examples of cognitive constraints are reported in the literature, reduced investor reaction to Friday news is not a manifestation of this phenomenon.


Moving Towards a FinTech National Banking Charter?

Michael H. Krimminger is Partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Krimminger, Pamela MarcoglieseDaniel IlanColin D. Lloyd, and Sandra M. Rocks.

Over the past two weeks, the Office of the Comptroller of the Currency (“OCC”) has taken two important steps potentially towards the chartering of national trust or special purpose banks focused on FinTech businesses. While clearly of interest to those who may seek a FinTech national trust or special purpose bank, these steps are also important because they reflect a broad interest among regulators in the regulatory implications of FinTech developments. While the U.S. has not, to date, pursued the “sandbox” approach used in some other countries, regulators’ focus on FinTech initiatives may help spur future FinTech opportunities through a reconsideration of some existing regulatory standards to provide additional flexibility for innovation.


CEO Succession Practices in the S&P 500: 2016 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2016 Edition, an annual benchmarking report authored by Dr. Tonello with Prof. Jason Schloetzer of the McDonough School of Business at Georgetown University and made possible by a research grant from executive search firm Heidrick & Struggles. For details regarding how to obtain a copy of the report, contact [email protected].

According to a new report by The Conference Board, the rate of succession of older CEOs of large U.S. public companies slowed significantly in 2015, bringing to a halt a generational shift in business leadership that had been observed since the financial crisis. The report, CEO Succession Practices: 2016 Edition, annually documents and analyzes succession events of chief executives of S&P 500 companies. In 2015, there were 56 cases of S&P companies that underwent a CEO turnover.

Prior editions of the study had shown an acceleration of the succession rate of CEOs aged 64 or older following the so-called Great Recession of 2008. In the 2009-2014 period, in particular, their average turnover rate was 25.5 percent, compared to 8.1 percent for younger CEOs. However, in 2015, older CEOs departed at a rate of 15.1 percent, which is much more aligned with the average number for the 2001-2008 period. There are multiple possible explanations for this finding, including of course an improvement in firm performance and the overall economy. Most important, given that older CEOs had been departing at a rate of 25 percent or higher for a number of years in a row, a slowdown was expected and signals the completion of a generational change process.


Distracted Shareholders and Corporate Actions

Alberto Manconi is Assistant Professor of Finance at Bocconi University. This post is based on a forthcoming article by Professor Manconi; Elisabeth Kempf, Assistant Professor of Finance at University of Chicago Booth School of Business; and Oliver G. Spalt, Professor of Behavioral Finance at Tilburg University.

Do institutional shareholders have an unlimited capacity to monitor firms, or are they subject to attention constraints? And if they are, what are the consequences for firm governance? While a growing literature in economics studies limited attention, its impact on corporate actions is largely unexplored (few exceptions include Teoh, Welch, and Wong (1998a,b), and Hirshleifer and Teoh (2003)). In our article, forthcoming in the Review of Financial Studies, we aim to fill this gap by focusing on the link between managerial actions and temporary changes in the attention of the institutional shareholders of the firm. We exploit unique features of the U.S. institutional holdings data to show that managers respond to temporarily looser monitoring, induced by investors focusing their attention on other parts of their portfolio, by engaging in investments that maximize their private benefits at the expense of shareholders.


Weekly Roundup: October 14, 2016–October 20, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 14, 2016–October 20, 2016.

Proposed Canada Business Corporations Act Amendments: A New Era?

Corporate Governance Indices and Construct Validity

Tournament Incentives and Firm Innovation

Private Tech Growth as an Asset Class

Voting Standards Are Not that Standard

Daniel Wolf and Michael P. Brueck are partners at Kirkland & Ellis LLP who specialize in mergers and acquisitions. The following post is based on a Kirkland publication by Mr. Wolf and Mr. Brueck.

As we enter the homestretch of the presidential election and the quadrennial bewilderment at the vagaries of the Electoral College system, it is an opportune moment to highlight that the voting standards for corporate shareholder approvals in the United States can be similarly confounding. The simple question of whether shareholder approval was obtained or a director elected is in fact subject to overlapping provisions of state law and the company’s organizational documents (and occasionally Federal law and stock exchange rules) that can be confusing and lead to mistakes.


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