Monthly Archives: July 2017

Board to Death: How Busy Directors Could Cause the Next Financial Crisis

Jeremy Kress is a Senior Research Fellow at the University of Michigan Center on Finance, Law, and Policy and an Assistant Professor of Business Law at the University of Michigan Ross School of Business (effective Fall 2018). This post is based on his recent paper.

By any measure, corporate directors lead exceptionally busy lives. Many directors hold full-time executive positions, and most serve on the board of at least one other company. Academics and policymakers debate whether directors’ outside professional commitments enhance or detract from their governance abilities. Directors, on one hand, might acquire valuable knowledge and practice by serving in governance capacities at other firms. On the other hand, however, busy directors might lack time to carefully review reports, assess strategy and risk, and attend board and committee meetings for all of the companies with which they are affiliated.


The Search for a Long-Term Premium

Tim Hodgson is head of the Thinking Ahead Group at Willis Towers Watson and executive at the Thinking Ahead Institute. This post is based on a Willis Towers Watson publication by Mr. Hodgson. 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).

Jaap van Dam, principal director of investment strategy at PGGM, one of the world’s largest asset owners known for its commitment to long-horizon investing, once asked what he called the million-dollar question: “Can we be reasonably certain that we will be rewarded for being a long-horizon investor? Because, if we’re not, then why bother?”

A sound answer to this question, as Jaap rightly put it, will determine whether long-horizon investing will really take off among asset owners.


Balancing the Governance of Financial Institutions

David Min is Assistant Professor of Law at University of California, Irvine, School of Law. This post is based on a recent article by Professor Min, forthcoming in the Seattle University Law Review.

Banking regulation is first and foremost preoccupied with the problem of excessive risk-taking by banks and other leveraged financial institutions, which can lead to bank runs and panics and their resulting high economic costs. In recent decades, regulators have sought to curb bank risk-taking almost exclusively through external “safety and soundness” regulations, emphasizing capital requirements, disclosure, and an intensive examination process. Modern banking regulation, both in the United States and abroad, has largely ignored the internal governance of banks and other financial institutions. Surprisingly, this is true even in the aftermath of the financial crisis, which seemed to illustrate the shortcomings of relying exclusively on external regulatory restrictions. To the extent that policymakers have considered financial institution governance, they have primarily done so through the lens of the corporate governance literature, which focuses on shareholder agency costs and generally promotes solutions that best align manager and shareholder interests.


Kokesh Raises Questions About Declinations with Disgorgement Under the FCPA Pilot Program

Alex Young K. Oh and Mark F. Mendelsohn are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Ms. Oh, Mr. Mendelsohn, Randolph T. Chen, and Matthew Driscoll.

On June 16, 2017, the United States Department of Justice issued a declination letter to Linde North America Inc. and Linde Gas North America LLC (collectively, “Linde”), American subsidiaries of a German multinational chemical company, closing an investigation against Linde for potential violations of the Foreign Corrupt Practices Act (“FCPA”). As part of the declination, DOJ required Linde to disgorge and forfeit over $11 million dollars obtained from, or relating to, the alleged corrupt scheme. The Linde declination is the sixth declination issued by DOJ since it announced the Fraud Section’s FCPA Enforcement Plan and Guidance (the “Pilot Program”) on April 5, 2016, [1] and the third declination where DOJ required a company to disgorge profits received from the alleged improper conduct. [2]


SEC Chairman Clayton on His Agenda

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu.

SEC Chairman Jay Clayton gave his first public address [on July 12, 2017], with some meaningful remarks directed at public company regulations.

The long-term interest of the Main Street Investor (the term is not defined but capitalized in his speech) is the cornerstone of how the SEC will measure whether it is being true to its mission regarding the protection of investors, facilitating capital formation and maintaining markets properly. The Main Street Investor is also characterized as “Mr. and Ms. 401(k)” and it is the SEC’s primary responsibility to ensure that they are informed and have the right opportunities to invest in their future.


Lighting Our Capital Markets

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Stein’s recent remarks in Boston, Massachusetts, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am so pleased to be with you today [July 11, 2017]. We all share an interest in ensuring that our markets are healthy. Strong and resilient markets are vital to having a strong and resilient economy.

Before I go further, let me pause to say that I am speaking today as an individual Commissioner and not on behalf of the SEC as a whole.

I was thinking last week about speaking with you, and I ran across an article about deep water corals. [1] Somehow, despite the low light environment of the deep ocean, corals that live hundreds of feet below the water’s surface also manage to glow in brilliant shades of orange and red.


Weekly Roundup: July 7–13, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 7–13, 2017.

The Law & Brexit XII

How Your Board Can Be Ready for Crisis

Second Circuit Rejects Shaw‘s “Extreme Departure Test”

Appraisal Practice Points Post-SWS

Have SEC ALJs Been Operating Contrary to the U.S. Constitution?

The Long Arm of the MAC

The Long Arm of the MAC

Daniel E. Wolf is a partner at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis publication by Mr. Wolf, and is part of the Delaware law series; links to other posts in the series are available here.

Dealmakers have long recognized the implications of a Material Adverse Effect (MAE/MAC) standard in a merger agreement. As the Delaware court noted in the Hexion case, a buyer asserting an MAC condition “faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its [contractual] obligation.”

In a recent Delaware case involving chocolate chip cookies, Chancellor Bouchard extended the reach of the MAC jurisprudence in assessing the termination of a license agreement between Mrs. Fields and Interbake.


Inelastic Labor Markets and Directors’ Reputational Incentives

Christopher Armstrong is EY Associate Professor of Accounting at The Wharton School of the University of Pennsylvania. This post is based on a recent paper authored by Professor Armstrong; David Tsui, Assistant Professor of Accounting at the University of Southern California Marshall School of Business; and John D. Kepler, The Wharton School of the University of Pennsylvania.

In our recent paper, Inelastic Labor Markets and Directors’ Reputational Incentives, we examine the extent to which independent directors on corporate boards face consequences for their individual performance and how these consequences, in turn, shape directors’ incentives. Prior studies of directors’ incentives largely focus on collective performance measures that are necessarily common to all directors at a given firm (e.g., a firm’s stock price and accounting performance during a particular period of time does not differ across its directors). However, relying on collective measures of performance can create free-rider problems among directors and can dampen any resulting incentives. Thus, to understand the factors that motivate directors to act in shareholders’ interests, it is important to assess whether directors face appreciable consequences from their individual performance.


Shareholder Proposal Developments During the 2017 Proxy Season

Ronald O. Mueller and Elizabeth Ising are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Mueller, Ms. Ising, and Lori Zyskowski.

This post provides an overview of shareholder proposals submitted to public companies for 2017 shareholder meetings, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

I. Shareholder Proposal Statistics and Voting Results

A. Shareholder Proposals Submitted

1. Overview

For 2017 shareholder meetings, shareholders have submitted approximately 827 proposals, which is significantly less than the 916 proposals submitted for 2016 shareholder meetings and the 943 proposals submitted for 2015 shareholder meetings.


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