Monthly Archives: May 2017

The Promise of Market Reform: Reigniting America’s Economic Engine

Adena Friedman is President and CEO of Nasdaq, Inc. This post is based on a Nasdaq publication by Ms. Friedman.

Robust public markets are the fuel that ignites America’s economic engine and wealth creation. Companies list on U.S. exchanges to access a steady, dependable stream of capital to grow and create jobs, and investors choose our markets because they are the world’s most trusted venues for long-term wealth creation.

Built on the shoulders of entrepreneurs with great ideas, public companies drive innovation, job creation, growth and opportunity across the global economy. A central reason for the success of U.S. capital markets is that American public companies are among the most innovative and transparent in the world. Additionally, the mechanisms that govern our markets ensure opportunity through fair and equal access—providing a solid foundation for the diversity of investing perspectives, participants and strategies represented in our capital markets.


Looking Behind the Declining Number of Public Companies

Les Brorsen is EY Americas vice-chair for public policy. This post is based on an EY publication by Mr. Brorsen, David Brown, Jeff Grabow, Chris Holmes, and Jackie Kelley.

Public market trends: US companies get bigger, more stable

US listings dropped after the dot-com bubble, but the market has largely stabilized, and US public companies today are much larger than in the past.

During the dot-com peak in 1996, US listings hit a record high of more than 8,000 domestically incorporated companies listed on a US stock exchange with an average market capitalization of $1.8b in today’s dollars. The number of domestic US-listed public companies decreased precipitously through 2003, with almost 2,800 companies lost because of M&A activity and delistings. By 2003, there were 5,295 domestic US-listed companies. The loss of domestic US-listed companies in 1996–2003 represents 74% of the loss from 1996 to date. (See figures 1 and 2). READ MORE »

The Dynamics of Managerial Entrenchment: The Corporate Governance Failure in Anglo-Irish Bank

Joanne Horton is a Professor of Accounting and Finance at the University of Exeter Business School. This post is based on a recent paper authored by Professor Horton; Dr. Gary Abrahams, Practitioner Research Fellow in the Accounting Department at the University of Exeter Business School; and Yuval Millo, Professor of Accounting at the University of Warwick Business School.

What are the dynamics through which corporate boards fail? While the corporate governance literature examines the relations between board composition and financial performance, it pays little attention to how exactly such relations unfold.

We aim to address this question in our recent paper The Dynamics of Managerial Entrenchment: The Corporate Governance Failure in Anglo-Irish Bank by examining one of the Irish banks embroiled in the Irish banking crisis of 2008-9—Anglo Irish Bank (hereafter, Anglo). We study the case of Anglo and examine, using interviews with key individuals involved in the bank, the dynamics on the board and among other managers, paying particular attention to relations between the board and Anglo’s CEO. Our choice to study Anglo was motivated by the fact that Anglo embodied dramatically a corporate failure: a bank that in less than 20 years moved from being a spectacular success, to collapsing, requiring the highest bailout to date from the Irish government.


Dual-Class: The Consequences of Depriving Institutional Investors of Corporate Voting Rights

Blair A. Nicholas is a partner and Brandon Marsh is senior counsel at Bernstein Litowitz Berger & Grossmann LLP. This post is based on a Bernstein Litowitz publication by Mr. Nicholas and Mr. Marsh. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Recent developments and uncertainties in the securities markets are drawing institutional investors’ attention back to core principles of corporate governance. As investors strive for yield in this post-Great Recession, low interest rate environment, large technology companies’ valuations climb amid the promises of rapid growth. But at the same time, some of these successful companies are asking investors to give up what most regard as a fundamental right of ownership: the right to vote. Companies in the technology sector and elsewhere are increasingly issuing two classes or even three classes of stock with disparate voting rights in order to give certain executives and founders outsized voting power. By issuing stock with 1/10th the voting power of the executives’ or founders’ stock, or with no voting power at all, these companies create a bulwark for managerial entrenchment. Amid ample evidence that such skewed voting structures lead to reduced returns long run, many public pension funds and other institutional investors are standing up against this trend. But in the current environment of permissive exchange rules allowing for such dual-class or multi-class stock, there is still more that investors can do to protect their fundamental voting rights.


The Fiduciary Dilemma in Large-Scale Organizations: A Comparative Analysis

Andrew Tuch is Associate Professor of Law at Washington University School of Law. This post is based on an article authored by Professor Tuch, forthcoming in Research Handbook on Fiduciary Law, edited by Andrew S. Gold & D. Gordon Smith.

In the 1970s and ’80s, as financial conglomerates grew significantly and diversified their operations, they increasingly faced conflicting duties and interests. For instance, thanks to their widening range of activities, firms found themselves obliged under agency law to disclose information to clients even when doing so violated duties of confidence to other clients. Firms also began to participate directly in transactions involving their clients, creating conflict between firms’ financial interests and fiduciary duties to clients. At the time, courts and scholars in the United States and United Kingdom observed the fundamental tension between firms’ organizational practices and the fiduciary duties they owed. Some saw in this “fiduciary dilemma” an existential problem: firms, ultimately, would need to slim down their operations, perhaps even to disaggregate, to avoid fiduciary liability.


Stuck with Steckman: Why Item 303 Cannot be a Surrogate for Section 11

Aaron J. Benjamin is an associate at Wilson Sonsini Goodrich & Rosati. This post is based on an article by Mr. Benjamin, originally published in the Harvard Business Law Review.

Item 303 of SEC Regulation S-K requires companies to disclose “known trends and uncertainties” in certain public filings. In securities class action litigation, plaintiffs increasingly allege the omission of such “known trends and uncertainties” as a basis for liability. But Item 303 provides no private right of action. A private plaintiff can bring an Item 303 action only if there is a separate violation of a securities law for which there is a private right of action. To state a claim under section 11 of the 33 Act, plaintiffs (and courts) rely on a decades-old Ninth Circuit decision, Steckman v. Hart Brewing Co. Steckman held that an Item 303 violation automatically states a claim under section 11, short-circuiting any separate consideration under the statute. This post examines the Steckman decision and contends that it was wrongly decided. Analysis in recent decisions by the U.S. Courts of Appeal for the Second, Third, and Ninth Circuits contradict Steckman’s holding. These courts held that an Item 303 violation does not sufficiently state a claim for liability under section 10(b) of the 34 Act, for the simple reason that Item 303 sets a lower threshold for materiality than 10(b): Item 303 materiality is defined by a “reasonably likely” standard set by the SEC, but 10(b) materiality is subject to a heightened “substantial likelihood” standard set by the U.S. Supreme Court in Basic v. Levinson. This post argues that this materiality distinction applies equally to section 11. Courts agree that an omission under section 11—like section 10(b)—must be material under the heightened Basic standard. Given that (i) an Item 303 violation cannot sufficiently establish Basic materiality, and (ii) Basic materiality is required under section 11, it follows that an Item 303 violation cannot be sufficient to state a claim for liability under Section 11. Steckman should be reconsidered.


Reviving the U.S. IPO Market

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Mr. Piwowar’s recent Opening Remarks at the SEC-NYU Dialogue on Securities Market Regulation. The views expressed in this post are those of Mr. Piwowar and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning, and thank you, Dean Henry, for that kind introduction. It is a pleasure to be here. Thanks also to Alexander Ljungqvist and others from the Salomon Center for the Study of Financial Institutions at New York University, as well as the staff in the Securities and Exchange Commission’s (“SEC”) Division of Economic and Risk Analysis, for organizing today’s [May 10, 2017] Dialogue.

I am happy to join you in this discussion and exchange of ideas on the current state of, and outlook for, the U.S. initial public offering (“IPO”) market. This event is particularly timely, because it coincides with the arrival of Jay Clayton, the SEC’s new Chairman as of last week. He has made it clear that, under his leadership, making public capital markets more attractive to business while providing appropriate safeguards for investors will be a priority for the Commission.


With the Benefit of Hindsight: The Wells Fargo Sales Practices Investigation Report

Arthur H. Kohn and Pamela L. Marcogliese are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Kohn, Ms. Marcogliese, Louise M. Parent and Elizabeth K. Bieber. Additional posts on Wells Fargo are available here.

On April 10, 2017 Wells Fargo released the independent directors’ report on sales practices at its community bank. While the report covers familiar elements of the widely-publicized accounts-creation problems at the bank, it also takes an inside look at the organization to determine what caused the problems in the first place and what allowed them to persist for years before last fall’s regulatory enforcement actions. The report cites the following as principal causes:


The Consequences of Managerial Indiscretions

Ralph A. Walkling is Christopher and Mary Stratakis Professor in Corporate Governance and Accountability and Founder of the Center of Corporate Governance at Drexel University LeBow College of Business. This post is based on a recent article authored by Professor Walkling; Brandon N. Cline, John “Nutie” and Edie Dowdle Associate Professor of Finance at the Mississippi State University College of Business; and Adam S. Yore, Assistant Professor in Finance at the Trulaske College of Business at University of Missouri.

In 2012, the Wall Street Journal (WSJ) reported that Scott Thompson, Yahoo’s CEO, allegedly lied about obtaining a computer science degree. In 2007, the WSJ reported that Chris Albrecht, the head of Time Warner’s HBO unit, allegedly assaulted his girlfriend outside a Las Vegas casino following the Oscar De La Hoya v. Floyd Mayweather Jr. boxing match. These revelations no doubt were personally embarrassing to Mr. Thompson and Mr. Albrecht, but were they important for Yahoo and Time Warner? Specifically, do these personal indiscretions imply firm-level consequences and are signals of personal integrity important for firm value?


Texas Bill Targets Activist Investors, Advisors

Dimitri Zagoroff is a Senior Proxy Research Analyst at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. Zagoroff. 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 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.

Regulations proposed by the Texas State Legislature would mark a blow to shareholder rights, subjecting investors, proxy advisors and other shareholder support firms to unprecedented disclosure requirements, and potentially serving to reverse the recent expansion of proxy access.

Texas House Bill 2382 would require “activist investors” in Texas-based public companies to register with the state’s Securities Commissioner, and provide both the state and the company in question with exhaustive disclosure (including “all plans, intentions, motives, strategies, and objectives” along with any related “notes, e-mails, memoranda, letters, communications, proposals, analyses, spreadsheets, presentations, instruments, and any other documents”, and associated costs) within 10 days of becoming a beneficial owner and activist investor. Moreover, the same extensive disclosure requirements apply to all beneficial owners of the activist investor “until the last person named is a natural person,” creating a massive headache for any fiduciary and privacy issues for savers. Failure to comply would constitute a Class C Misdemeanor, equivalent to simple assault or criminal trespassing.


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