Monthly Archives: March 2017

How Delaware May Be Dethroned and Why It Should Not

Charles M. Elson is the Edgar S. Woolard, Jr. Chair in Corporate Governance and Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. This post is based on his recent paper and is part of the Delaware law series; links to other posts in the series are available here.

Delaware’s preeminent role in corporate regulation has endured for several important reasons. Most importantly, the state’s entire approach to the corporate law has been centered on investor protection. Although through the years the ways by which it has tried to achieve this protection have changed, it is this animating principle that defines its laws. Investors are keenly aware of this fact and seek and respect the approach. Delaware’s primary industry is corporate regulation, and to maintain its franchise, it must carry out its responsibilities fairly, intelligently and responsibly. Its corporate code is the most advanced in the country. Its judiciary has unusual expertise in the field and is highly respected in the resolution of corporate disputes. [1] In recent years, the state has maintained a delicate balance between upholding shareholder power and board prerogative. It is favored as the nation’s finest and most balanced forum for corporate dispute resolution by both investors and managers as there are no real major local corporate interests as seen in other larger jurisdictions to affect its perceived neutrality. While other states, most notably Nevada and North Dakota, have attempted to usurp its franchise either through statutes that are seemingly more protective of management or shareholder friendly, none has succeeded largely because of the difficulty in creating an experienced and recognized corporate judiciary. Delaware possesses a powerful franchise that would be difficult for any other state to reproduce both judicially and, because of the potential influence in other jurisdictions of local corporate interests, practically.

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Governance in the Changing U.S. Political Landscape

George Dallas is Policy Director and Kerrie Waring is Executive Director at International Corporate Governance Network (ICGN). The following post is based on an ICGN publication. Additional posts addressing legal and financial implications of the Trump administration are available here.

Consistent with their stewardship obligations, institutional investors around the world regularly monitor and assess changing political dynamics, geopolitical tensions, economic stability and systemic risks. This broad purview of political assessment includes the outcomes of key elections in 2016 that triggered a new policy trajectory in important global markets where global institutional investors have considerable holdings and exposure. A particular focus is currently on the United States, with the new Trump Administration now in place. The specific policy changes of the Trump Administration and their implications are still taking shape, and remain a point of controversy, both politically and economically. These developments in several cases challenge or may contradict established principles of corporate governance and sustainability, and present potential conundrums for companies and investors—and for standard setters and regulators who aim to attract inward investment whilst ensuring efficient markets.

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Weekly Roundup: March 24–30, 2017


More from:

This roundup contains a collection of the posts published on the Forum during the week of March 24–30, 2017.

Is the American Public Corporation in Trouble?




Does the Market Value Professional Directors?




Are Large Banks Valued More Highly?


Another “Choice” for Bank Regulatory Reform?






Corporate Employee-Engagement and Merger Outcomes



The Investor Stewardship Group: An Inflection Point in U.S. Corporate Governance?

John C. Wilcox is Chairman of Morrow Sodali. This post is based on a Morrow Sodali publication by Mr. Wilcox. Additional posts on the Investor Stewardship Code are available here.

A potentially influential new organization of institutional investors has made its presence known in the U.S. corporate governance scene. On January 31, 2017, the Investor Stewardship Group (ISG), a “collective” of some of the largest U.S. and international investors, announced the launch of an ambitious program to establish a set of basic corporate governance principles for U.S. listed companies and a parallel set of stewardship principles for U.S. institutional investors (discussed on the Forum here). This unprecedented event could be a turning point in the evolution of U.S. governance practice.

Here are some of the reasons why the ISG and its principles could have a significant impact on U.S. companies:

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Int’l Brotherhood—Reduction of Merger Litigation Risk by Massachusetts Supreme Court

David J. Berger is Partner at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini publication.

The recent decision by the Massachusetts Supreme Judicial Court in Int’l Brotherhood of Electrical Workers Loc. No. 129 Benefit Fund v. Tucci has the potential to significantly reduce merger litigation for publicly traded companies incorporated in Massachusetts. The decision, arising out of the Dell/EMC transaction, held that because directors of a Massachusetts company generally owe fiduciary duties only to the corporation and not directly to shareholders, a claim that the price paid in a merger is too low may only be brought as a derivative claim, not as a direct claim.

As part of its ruling, the court specifically rejected the plaintiffs’ argument that “shareholders claiming the loss of their stock at an unfair price on account of allegedly improper actions by the board of directors is a direct rather than a derivative claim.” [1] The court’s holding means that Massachusetts law differs fundamentally from Delaware law on the scope of a director’s fiduciary duties (and corresponding risk of liability), especially in the merger context. As a result of this decision, a shareholder of a Massachusetts corporation generally does not have a direct claim that the price paid in a merger is too low, or that the process employed by the board—even if unfair—causes direct injury to the shareholder.

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Corporate Employee-Engagement and Merger Outcomes

Hao Liang is Assistant Professor of Finance at Singapore Management University, and Luc Renneboog is Professor of Corporate Finance at Tilburg University. This post is based on a recent paper by Professor Liang, Professor Renneboog, and Cara Vansteenkiste.

Corporations represent a nexus of implicit and explicit contracts between shareholders and stakeholders. An important stakeholder group that is crucial to firms’ operations and performance consists of the employees, representing a firm’s human capital. Employees are involved in the firm’s daily operations, have a contractual claim on the company in the form of salaries, and can directly and indirectly influence corporate decision making and governance. However, the extant literature offers mixed evidence on the direction and mechanisms through which firms’ employee-engagement—policies and practices that aim to provide better welfare (e.g., higher compensation and job security, more training and career advancement, the improvement of workforce health and safety, enhancement of workforce diversity) for employees—affects firm value. Some find a negative relation between shareholder value and labor orientation, explaining this relation by (too strong a) legal protection of workers (e.g. Dessaint, Golubov, and Volpin, 2016) and manager-employee alliances (Pagano and Volpin, 2005). Human relations theories take a positive view on labor, arguing that labor is a key organizational asset and that stronger employee incentives increase productivity, such that a firm’s orientation towards labor can create substantial value for shareholders (Edmans, 2011).

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2017 Compensation Committee Guide

Michael J. Segal is the senior partner in the Executive Compensation and Benefits Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication.

The past year has been marked by a continued focus by shareholders and investor groups on executive compensation, and a related continued need for compensation committees to proactively manage their companies’ communications with shareholders and proxy advisory firms—both in the context of the nonbinding, advisory “say-on-pay” votes required by Dodd-Frank and also as preemptive actions against possible shareholder activists seeking the means by which to challenge board composition. While 2015 witnessed finalization by the U.S. Securities and Exchange Commission (the “SEC”) of the Dodd-Frank pay ratio disclosure rules and the issuance of proposed rules regarding clawbacks and pay vs. performance disclosure, the 2016 election has thrown the continued viability of those rules into doubt. Additionally, the plaintiffs’ bar continues to challenge compensation decisions, often with little success but great annoyance.

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2017 Institutional Investor Survey

John C. Wilcox is Chairman of Morrow Sodali. This post is based on a Morrow Sodali publication by Mr. Wilcox.

There is an increased emphasis being placed on Environmental, Social and Governance (ESG) considerations by the investment community. ESG considerations’ shift into the mainstream is being propelled by regulatory changes and the proliferation of data substantiating that ESG integration can help increase risk-adjusted investment returns. Despite the current political uncertainty around the world, it appears that investors are determined to continue their push for progressive governance changes through increased engagement with individual companies. Asset owners are also continuing to demand from their asset managers whether they are executing responsibilities in line with the owners’ investment objectives. Consequently, large institutional investors and pension funds are pushing for more aligned approaches to corporate governance across borders to support long-term value creation.

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Controlling Systemic Risk Through Corporate Governance

Steven L. Schwarcz is a Senior Fellow with the Centre for International Governance Innovation (CIGI) and the Stanley A. Star Professor of Law & Business at Duke University School of Law. This post is based on a recent paper by Professor Schwarcz.

In Policy Brief No. 99—February 2017 of the Centre for International Governance Innovation (CIGI), I explain how corporate governance could be used to help control systemic risk. Excessive risk taking by systemically important financial firms is widely seen as one of the primary causes of the 2007-2008 global financial crisis. Most of the post-crisis regulatory measures to control that risk taking are designed to reduce moral hazard and to align the interests of managers and investors. These measures may be flawed, I argue, because they are based on questionable assumptions.

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The “Why” Question in Investment Theory

Saker Nusseibeh is Chief Executive of Hermes Investment Management, chair of its Executive Committee, and an Executive Board Director. This post is based on a Hermes publication.

Economics has developed as a science, conveniently forgetting its roots in political philosophy. Unfortunately that “science” is severely dated, and the functioning of the global capital markets has become separated from the real world. A simple thought experiment throws light on the theoretically correct strategies for a rational saver, but leaves us with unsatisfactory answers. Neglecting the societal context of our saving activity only serves to further isolate the capital markets. Instead, a self-perpetuating system requires investors to evolve from simple allocators of capital to its steward, with far broader responsibilities. Maximising holistic returns represents practical action of the responsibility by investors, and stretches far beyond creating wealth simply for its own sake.

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