Monthly Archives: January 2017

Shareholder Challenges Pay Practice at Apple, Inc.

Joseph E. Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on a column by Mr. Bachelder which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this post.

An Apple Inc. shareholder has proposed the following resolution be adopted at the 2017 annual shareholders’ meeting:

“Resolved: shareholders recommend that Apple Inc. engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.”

In a no-action letter issued Oct. 26, 2016, the SEC concurred with the shareholder, Dr. Jing Zhao, that the proposed resolution be included in Apple’s proxy statement for the 2017 meeting. [1]


Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts

Todd Gormley is Associate Professor of Finance at Washington University in St. Louis Olin Business School; and David A. Matsa is Associate Professor of Finance at Northwestern University Kellogg School of Management. This post is based on their recent article. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang.

There is not one conflict between managers and shareholders. Various different underlying frictions create many manager-shareholder agency conflicts. Understanding the relevance of these various conflicts and how they vary across firms is crucial for designing incentive and governance structures that mitigate the impact of these conflicts on shareholder value and potentially the aggregate economy. For example, if a manager fails to make risky investments out of a reluctance to exert costly effort and a desire to pursue the “quiet life”, then shareholders might wish to increase the manager’s ownership stake to better align their interests and encourage risk taking. On the other hand, if the manager forgoes these investments because of risk aversion and the potential impact of failure on his or her income and wealth, then increasing the manager’s ownership stake in the firm will only worsen the agency conflict. Understanding the source of the agency conflict also has important implications for a firm’s optimal leverage and cash management policies.


Weekly Roundup: January 6, 2016–January 12, 2017

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This roundup contains a collection of the posts published on the Forum during the week of January 6, 2016–January 12, 2017.

Constitutionality of SEC’s Administrative Law Judges Headed to Supreme Court?

Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right

Jesse Fried is the Dane Professor of Law at Harvard Law School and Charles C.Y. Wang is an Assistant Professor of Business Administration at Harvard Business School. This post is based on a recent paper authored by Professor Fried and Professor Wang. Related research from the Program on Corporate Governance includes: Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang; and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

A fierce debate has been raging over whether shareholder-driven “short-termism” (or “quarterly capitalism”) is a critical problem for U.S. public firms, their investors, and the nation’s economy. Certain academics (Bratton and Wachter, 2010; Coffee and Palia, 2015), corporate lawyers (Lipton, 2015), Delaware judges (Strine, 2010), and think tanks (Aspen Institute, 2009) contend that quarterly capitalism, exacerbated by the growing power of hedge funds, is substantially impairing firms’ ability to invest and innovate for the long term. Pushing back against this view, a number of academics have forcefully argued that hedge funds play a useful role in the market ecosystem (Bebchuk and Jackson, 2012; Gilson and Gordon, 2013; Kahan and Rock, 2007) and that concerns over short-termism are greatly exaggerated (Bebchuk, 2013; Roe, 2013).

The empirical evidence on shareholder activism and short-termism is, in fact, mixed. Market pressures can lead executives to act in ways that boost the short-term stock price at the expense of long-term value (Bushee, 1998; Dichev et al., 2013; Graham et al., 2006) and may undesirably reduce investment at public firms (Asker et al., 2015). But these costs must be weighed against the potential reduction in agency costs created by greater director accountability to shareholders. One prominent study finds evidence of such benefits, reporting that shareholder activism increases the stock price at targeted firms in both the short term and the long term (Bebchuk et al., 2015). Subsequent work, however, seeks to challenge these findings (Cremers et al., 2016).


2016 Year-End Activism Update

The following post comes to us from Gibson, Dunn & Crutcher LLP and is based on a Gibson Dunn publication by Barbara L. BeckerRichard J. BirnsDennis J. Friedman, Eduardo Gallardo, and Adam J. Brunk. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (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).

This post provides an update on shareholder activism activity involving domestically traded public companies with equity market capitalizations above $1 billion during the second half of 2016. Notwithstanding a difficult market backdrop in 2016, including the surprise “Brexit” vote, a bitterly fought U.S. presidential campaign, a significant decline in oil prices, and vigorous public debate on “short-termism,” activist investors continued to be busy across a wide range of industries (even if fewer campaigns made major headlines). Furthermore, in 2016 as compared to 2015, our survey found relative consistency in the total number of public activist actions (90 vs. 95), the number of activist investors involved in such actions (60 vs. 56), and the number of companies targeted by such actions (78 vs. 81).


A Strategic Cyber-Roadmap for the Board

Dr. Andrea Bonime-Blanc is the lead cyber-risk governance author and researcher for The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Dr. Bonime-Blanc; the series is edited by The Conference Board’s managing director Matteo Tonello.

This post reviews five director case studies of cyber-risk governance, compiled by The Conference Board Governance Center through interviews with board members who hold seats at a variety of public and non-public companies, including technology companies, Fortune 100 financial services companies, top 10 federally chartered credit union and professional associations. The case studies show examples of how boards are addressing their cyber oversight responsibilities including the formation of a board committee dedicated to technology, the importance of management reporting on cyber-risk, finding a director with cybersecurity governance skills and the importance of a third-party assessment of a company’s cyber-strategy. Because there is significant risk exposure today for a cyber-breach, boards need to be fully informed and ready to address their cyber activities including understanding the company’s crown jewels, their preparedness for an attack, company risk framework, current regulatory environment, etc.


Corporate Governance: The New Paradigm

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post includes the text of two recent publications prepared by Mr. Lipton for the International Business Council of the World Economic Forum: The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, as well as The Compact for Responsive and Responsible Leadership: A Roadmap for Sustainable Long-Term Growth and Opportunity. Additional posts by Martin Lipton on short-termism and corporate governance are available here. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (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).

At the invitation of the International Business Council of the World Economic Forum, I prepared The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth. I presented The New Paradigm at the August 2016 meeting of the IBC and it was unanimously approved by those in attendance. The IBC is now seeking signatures from all participants in its January 2017 meeting to The Compact for Responsive and Responsible Leadership: A Roadmap for Sustainable Long-Term Growth and Opportunity. The Compact includes key features of The New Paradigm. Endorsement and adherence by business corporations, institutional investors and asset managers to The Compact and The New Paradigm will substantially alleviate short-term pressures and will promote sustainable long-term investment and growth. I believe this is a unique opportunity to make a real difference. I recommend endorsement and adherence to The Compact and The New Paradigm, not just by those attending the IBC meeting, but by all corporations, institutional investors and asset managers.

The rest of the post includes the full text of the New Paradigm, followed by the Compact.


Process Is Paramount—Giving “100% Weight” to Merger Price in Determining Fair Value

Jason M. Halper is partner and Co-Chair of the Global Litigation Group at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper, Jared Stanisci, and Dori Y. Cohen, and is part of the Delaware law series; links to other posts in the series are available here.

On December 16, 2016, the Delaware Court of Chancery issued a post-trial opinion in an appraisal proceeding arising from the acquisition of Lender Processing Services, Inc. (“LPS” or the “Company”) by Fidelity National Financial, Inc. (“Fidelity”). In his opinion in Merion Capital LP et al. v. Lender Processing Services Inc., C.A. No. 9320-VCL (Del. Ch. Dec. 16, 2016), Vice Chancellor Laster held that the “fair value” of the Company’s stock at the effective time of the merger was the $37.14/share merger price. LPS is just the latest of several relatively recent decisions equating fair value and merger consideration where the merger was the product of an appropriate sale process consisting of, among other things, an arm’s-length negotiation conducted by an independent and informed board advised by independent financial advisors. Delaware courts have been equally clear, however, that they will not accord such weight to the merger price in determining a company’s fair value where the transaction is not the product of such a properly conducted sale process. The decision reinforces the importance that a board and management implement in advance a vigorous and conflict-free process for selling a company in order to defeat shareholder appraisal or fiduciary duty challenges.


Top 250 Report on Long-Term Incentive Grant Practices for Executives

Warren Suh and Caroline Cubberly are consultants at FW Cook. This post is based on the Executive Summary of a FW Cook publication by Mr. Suh, Ms. Cubberly, and Edward D. Graskamp.

In 2016, external forces, including Dodd-Frank Act rules, Say-on-Pay and proxy advisors, continue to influence the executive compensation landscape. Meanwhile, internally, major overhaul to long-term incentive plans at large companies over the years have resulted in most plan designs and practices now more closely aligned with a pay-for-performance philosophy. With Say-on-Pay in its sixth year and 94% of the Top 250 already using performance-based awards in their long-term incentive programs, companies are shifting attention to finding the right balance of grant types and performance features that provide meaningful retention and incentivize proper behavior. Nearly 90% of the Top 250 use two or more grant types, and 58% of performance awards feature two or more performance metrics. The prevalence of performance awards increased, coming at the expense of stock options and stock appreciation rights (“SARs”), which have declined notably since 2014. The 2016 Top 250 marks the first time that use of stock options/SARs (60% of Top 250) dips below the use of restricted stock grants (62%).


Mergers and Acquisitions—A Brief Look Back and a View Forward

Andrew Brownstein and Steven Rosenblum are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication.

M&A activity in 2016 had a slow start and a strong finish, reaching $3.7 trillion globally, behind 2015, but the third-busiest year on record. Deals involving U.S. targets were strong at just under $1.7 trillion, and represented a share of total global deal value comparable to 2015. Overall, 2016 had its share of large deals, albeit trailing 2015 levels, with 45 deals over $10 billion (compared to 69 in 2015) and 4 deals over $50 billion (compared to 10 in 2015). The year also set a record in announced friendly deals that were withdrawn or terminated, many due to regulatory issues, with $567 billion of U.S. M&A deals falling into this category.


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