Yearly Archives: 2016

The Role of Mutual Funds in Corporate Governance

Posted by Yawen Jiao, University of California, Riverside, on
Thursday, June 30, 2016
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Yawen Jiao is Assistant Professor of Finance at the University of California, Riverside. This post is based on an article authored by Professor Jiao and Ying Duan, Assistant Professor of Finance at the University of Alberta.

Mutual funds hold about a quarter to a third of outstanding shares of U.S. companies in the past decade and therefore have the potential to play a pivotal role in corporate governance. In our article, The Role of Mutual Funds in Corporate Governance: Evidence from Mutual Funds’ Proxy Voting and Trading Behavior, forthcoming in the Journal of Financial and Quantitative Analysis, we simultaneously consider two governance approaches of mutual funds in the proxy voting setting: First, they can follow the “Wall Street rule” when dissatisfied with firm management, that is, sell their shares and “exit” the firm. This approach is modeled by Admati and Pfleiderer (2009), Edmans (2009), and Edmans and Manso (2011). Second, they can attempt to directly intervene (“voice”) by voting against firm management, as suggested by theories of Shleifer and Vishny (1986), Maug (1998), and Kahn and Winton (1998).

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Seven Deadly Fallacies of Activist Investing’s Critics

Posted by Charles Nathan, Finsbury LLC, on
Wednesday, June 29, 2016
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Charles Nathan is a senior advisor at Finsbury LLC, and an adjunct professor at Yale Law School and Columbia Law School. This post is based on a commentary by Mr. Nathan. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Attacks on activist investing often tread a familiar and well-worn road, long on inflammatory rhetoric and specious arguments and short on reason and respect for the facts. A recent example is a commentary by two Wachtell Lipton lawyers entitled “Corporate Governance Update: Holding Activists and Proxy Advisory Firms Accountable,” published in the New York Law Journal on May 26, 2016 (and discussed on the Forum here).

The article’s message, like so many criticisms of activist investing, is built on seven fatal fallacies.

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Does the Market Value CEO Styles?

Posted by Luo Zuo, Cornell University, on
Wednesday, June 29, 2016
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Luo Zuo is Assistant Professor of Accounting at Cornell University. This post is based on an article authored by Professor Zuo and Antoinette Schoar, Professor of Entrepreneurship at MIT.

In our article, Does the Market Value CEO Styles?, recently published in the American Economic Review, we study how investors perceive the skill set that different types of CEOs bring into their companies. A growing body of research offers evidence that CEOs and other top executives show large and persistent person-specific heterogeneity in their management styles. Bertrand and Schoar (2003) document that such person-specific styles explain a substantial fraction of the variation in firms’ capital structures, investment decisions and organizational structures. The idea that CEOs greatly differ in their styles is also supported by a number of papers that show substantial changes in a firm’s stock price and accounting performance when its top management changes. For example, Perez-Gonzalez (2006) and Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon (2007) focus on transitions to family CEOs, and Parrino (1997) focuses on internal versus external successors. Similarly, a large literature suggests that CEOs’ specific traits play a role in their management approach. See, for example, Malmendier and Tate (2008) on CEO overconfidence; Kaplan, Klebanov and Sorensen (2012) on general ability and execution skills; Graham, Harvey and Puri (2013) on optimism and risk aversion; and Benmelech and Frydman (2015) on prior military experience.

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Focusing the Lens of Disclosure on Board Diversity, Non-GAAP, and Sustainability

Posted by Mary Jo White, U.S. Securities & Exchange Commission, on
Tuesday, June 28, 2016
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent keynote address to the International Corporate Governance Network Annual Conference. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Investors and regulators everywhere share a common interest in effective disclosures, robust corporate governance practices and strong corporate cultures, which are fundamental for fair and efficient markets and to achieve sustainable value. But, as the preamble to ICGN’s Global Governance Principles acknowledges, there are differences from jurisdiction to jurisdiction as to what precisely we are trying to achieve and the tools available to us. So, I thought I would begin by discussing the regulatory framework in the United States with respect to corporate governance matters and how the SEC, long known as “the disclosure agency,” fits into the framework. Then, reflecting on the extent of the SEC’s disclosure authority, I will discuss my perspective on the work we are doing on three important subjects on your agenda—board diversity; non-GAAP financial measures; and sustainability reporting.

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Brexit: What Does the Vote Mean for Business?

Posted by Barnabas Reynolds, Shearman & Sterling LLP, on
Tuesday, June 28, 2016
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Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds, Thomas Donegan, and James Webber. Related posts on the legal and financial impact of Brexit include Brexit: Possible Options and Impact, also from Shearman & Sterling; Brexit: Legal Implications, from Sullivan & Cromwell LLP; and The Day After Brexit, from Cadwalader, Wickersham & Taft LLP.

[On June 24, 2016], it was announced that the UK public has voted to leave the European Union. There will now be a negotiation of a new relationship between the UK and Europe. The fact of the vote itself has no legal effect on the laws of the UK or EU. The UK will remain a member of the EU until there is either an agreement to exit or expiry of a two-year period after issuance of a formal notice of exit by the UK government. That notice, when served, triggers a negotiation period of up to two years during which time the current EU laws continue to apply in the UK. The UK will lose some of its rights to participate in EU political processes during this period.

This post discusses potential legal models for any post-Brexit negotiated solution in the context of financial business in particular.

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Pushbacks and Delaware Appraisal Arbitrage

Posted by Jack B. Jacobs, Sidley Austin LLP, on
Tuesday, June 28, 2016
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Jack B. Jacobs is a senior counsel at Sidley Austin LLP, and served on the Delaware Supreme Court from 2003 to 2014 and, prior to that, on the Delaware Court of Chancery since 1985. The views expressed in this post are those of the author and do not necessarily reflect the views of the firm. This post is part of the Delaware law series; links to other posts in the series are available here.

For over a decade hedge funds have utilized Delaware’s appraisal statute as a strategy to arbitrage either the statutory interest rate, or the possibility of a litigated capital gain, or both. Typically, hedge funds will buy into the stock of the target company after a merger is announced, and then litigate or settle the case at a premium above the deal price. Despite the protests of the corporate defense bar, the Delaware courts have held that this practice, whether or not desirable as a policy matter, is not legally prohibited.

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Do Courts Matter for Firm Value? Evidence from the U.S. Court System

Posted by Stefano Colonnello, IWH and Christoph Herpfer, EPFL, on
Tuesday, June 28, 2016
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Stefano Colonnello is Assistant Professor at the Halle Institute for Economic Research (IWH) and Junior Professor at Otto von Guericke University Magdeburg. Christoph Herpfer is a PhD Candidate at the Swiss Finance Institute at École Polytechnique Fédérale de Lausanne. This post is based on a recent paper authored by Professor Colonnello and Mr. Herpfer.

Courts provide an important link between the legal system and economic development. Our paper, Do Courts Matter for Firm Value? Evidence from the U.S. Court System, which is publicly available on SSRN, studies if and how courts affect firm value. We distinguish between two main channels through which courts can impact firm value. First, courts may benefit firms by providing efficient and competent resolution of cases thus reducing legal uncertainty and litigation costs, a hypothesis we refer to as the efficiency channel. Alternatively, courts can affect firm value by transferring resources from plaintiffs such as customers or employees to shareholders (or vice versa), a business attitude channel.

The key challenge in measuring the impact of courts on firms is to isolate the impact of laws from that of courts, the institutions that enforce those laws. Any study comparing measures of court characteristics across states or countries is invariably comparing not just different courts, but different laws, firms, or political and social environments.
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The Legal Consequences of Brexit

Posted by Simon Witty, Davis Polk & Wardwell LLP, on
Monday, June 27, 2016
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Simon Witty is a partner in the Corporate Department at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Related posts on the legal and financial impact of Brexit include Brexit: Legal Implications, from Sullivan & Cromwell LLP, and The Day After Brexit, from Cadwalader, Wickersham & Taft LLP.

On June 23, 2016, the UK electorate voted to leave the European Union. The referendum was advisory rather than mandatory and does not have any immediate legal consequences. It will, however, have a profound effect. With any next steps being driven by UK and EU politics, it is difficult to predict the future of the UK’s relationship with the EU. This post discusses the process for Brexit, the alternative models of relationship that the UK may seek to adopt, and certain implications for the capital markets, mergers and acquisitions, contractual disputes and enforcement, anti-trust, financial services and tax.

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Golf Buddies and Board Diversity

Posted by Sumit Agarwal, National University of Singapore, on
Monday, June 27, 2016
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Sumit Agarwal is Professor of Finance at the National University of Singapore. This post is based on a paper authored by Professor Agarwal; Wenlan Qian, Associate Professor of Finance at the National University of Singapore; David Reeb, Professor of Finance at the National University of Singapore; and Tien Foo Sing, Associate Professor of Finance at the National University of Singapore.

Studies have shown that firms benefit from corporate boards comprising men and women. Yet in 2014, women’s share of board seats in developed economies averaged 16.7 percent, varying from 3 percent in Japan to 19 percent in the US, and 30 percent in France. There is a gender glass ceiling in board representation. But women can overcome it, and some do.

In our paper, Playing the Boys’ Game: Golf Buddies and Board Diversity, forthcoming in the American Economic Review: Papers and Proceedings, We explore the role of informal networks and gender ceiling in the executive labor market using data on golf games. Specifically, we study whether women who play golf—a largely male-dominated sport—are also more likely to serve on the board of directors of publicly listed companies.

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SEC and Mining Disclosures

Posted by Nicolas Grabar and Sandra Flow, Cleary Gottlieb Steen & Hamilton LLP, on
Sunday, June 26, 2016
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Nicolas Grabar and Sandra L. Flow are partners in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Grabar, Ms. Flow, Jonathan Mendes de Oliveira and Daniel Chor.

The U.S. Securities and Exchange Commission (the “SEC”) proposed last week to replace completely its disclosure requirements for SEC-registered companies engaged in mining activities.

The proposal, issued on June 16, responds to repeated calls over the years for the SEC to improve its mining disclosure requirements and harmonize them with international standards.

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