Monthly Archives: November 2017

Governance and Transparency at the Commission and in Our Markets

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at the PLI 49th Annual Institute on Securities Regulation. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

My remarks will focus on governance and transparency. These issues are, of course, related. Among its many benefits, transparency facilitates effective governance. My first topic will be transparency with respect to the operations of the Securities and Exchange Commission (the “SEC” or the “Commission”). Then I will turn to transparency in our securities markets—or said another way, how we can reduce opacity and, thereby, enhance our efforts to deter, mitigate, and eliminate fraud.

Commission Governance—The SEC’s Agenda

Rulemaking is a key function of the Commission. And, when we are setting the rules for the securities markets, there are many rules we, the SEC, must follow. The most well-known is the Administrative Procedure Act, or the APA. Another statute—a transparency-oriented one—is the Regulatory Flexibility Act, or the RFA. The goal of the RFA is to fit regulatory and informational requirements to the scale of businesses. That objective—in two words, regulatory proportionality—rings true with me. Under the RFA, federal agencies must “prepare an agenda of all regulations under development or review.” The agenda then distinguishes between rulemakings to be accomplished in the near-term—one-year—and the long-term—more than a year.


Voting Rights and Index Inclusion

This post is based on a publication from BlackRock, Inc. 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).

BlackRock is a strong advocate for equal voting rights for all shareholders. However, we disagree with index providers’ recent decisions to exclude certain companies from broad market indices due to governance concerns. Those decisions could limit our index-based clients’ access to the investable universe of public companies and deprive them of opportunities for returns.

Policymakers, not index providers, should set equity investing and corporate governance standards. BlackRock supports the creation of regulatory regimes that increase financial market transparency, protect investors, and facilitate responsible growth of capital markets.


Analysis of ISS Policy Application Survey

Lyuba Goltser is a partner and Reid Powell is an associate at Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Goltser and Mr. Powell.

[On October 19, 2017], ISS released the results of its Policy Application Survey. This follows the release of its Governance Principles Survey in late September. The Governance Principles Survey is high-level and covers “one share, one vote,” board gender diversity, cross-market company share issuances and repurchases, the use of virtual meetings, and pay ratio disclosures. The more in-depth Policy Application Survey drills down into key issues by market and region as well as by topic, such as responsible investment, takeover defenses, and compensation. The Policy Application Survey results provide views of investors and non-investors and the results of these surveys often are a precursor of changes to ISS’ voting policies. [1]

ISS is expected to publish draft 2018 policy updates and open a comment period in late October and release its final policy updates in mid-November. Key takeaways from the Governance Principles Survey are available here. Takeaways of the Policy Application Survey applicable to U.S. public companies are as follows:


Shareholder Conflicts and Dividends

Janis Berzins is Associate Professor of Finance; Øyvind Bøhren is Professor of Finance and Founding director of the Centre for Corporate Governance Research, and Bogdan Stacescu is Associate Professor of Finance at BI Norwegian Business School. This post is based on their recent article.

This article, which is forthcoming in the Review of Finance, studies empirically how the controlling shareholder uses the firm’s dividend policy to manage the relationship with other shareholders. There are two alternative views. The opportunistic hypothesis recognizes that the controlling shareholder may feel tempted to capture private benefits at the other shareholders’ expense. For instance, the controlling shareholder may make the firm trade at unfair prices with another firm he owns, hire family members at excessive salaries, and use the firm’s resources to build personal prestige. Such actions can reduce the firm’s ability to pay dividends.

The competing view is the conflict-reducing hypothesis, where the controlling shareholder uses dividends to mitigate conflicts and build reputation for being fair. This strategy may increase the access to new equity and reduce the cost of capital. Hence, dividends will be lower the more serious the potential shareholder conflict under the opportunistic hypothesis, but not under the conflict-reducing hypothesis. Our paper investigates which of these two very different governance strategies firms use in practice.


Program Hiring Post-Graduate Academic Fellows

The Harvard Law School Program on Corporate Governance is pleased to announce the availability of positions of Post-Graduate Academic Fellows in the areas of corporate governance and law and finance. Qualified candidates who are interested in working with the Program as Post-Graduate Academic Fellows may apply at any time and the start date is flexible.


The Golden Leash and the Fiduciary Duty of Loyalty

Gregory H. Shill is an Associate Professor of Law at the University of Iowa College of Law. This post is based on an article recently published in the UCLA Law Review and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Servants of Two Masters? The Feigned Hysteria Over Activist-Paid Directors, by Yaron Nili (discussed on the Forum here).

Traditionally, activist hedge funds identify a company ripe for improvement, acquire a toehold position in the company’s stock, and then launch a campaign to convince shareholders to dump incumbent directors in favor of candidates nominated by the fund. In recent years, some funds have begun experimenting with a variation on this practice by offering incentive pay in the form of bonuses to directors they nominate, over and above the compensation all directors receive from the company for their service on the board. These bonuses, known as “golden leashes,” have further polarized the debate over shareholder activism and short-termism. I examine the phenomenon more critically in a recent article, The Golden Leash and the Fiduciary Duty of Loyalty, recently published in the UCLA Law Review.


Canadian Responses to Proxy Access Proposals

Courteney Keatinge is Director of Environmental, Social & Governance research at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Ms. Keatinge. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot, and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

After months of suspense, both Royal Bank of Canada and Toronto-Dominion have bowed to investor pressure and adopted U.S.-style proxy access. Both companies faced non-binding shareholder proposals requesting the provision at their 2017 AGMs, receiving 47% and 52% support respectively, and both companies have protested that the U.S. standards of a 3% ownership threshold and 25% nominating power are incompatible with the existing proxy access rights provided under the Canadian Bank Act. From some investors’ perspective, it’s clearly a positive that the banks have responded to the non-binding votes; however, it’s less clear whether the hybrid, faux U.S.-style proxy access they’ve now adopted actually represents an improvement on what they already had under the Bank Act.


Tax Reform and Executive Compensation

Bentham W. Stradley is Managing Partner and James F. Dickinson is Principal at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Stradley and Mr. Dickinson.

On November 2nd, the House Ways and Means Committee introduced its tax reform bill, referred to as the ‘Tax Cuts and Jobs Act.’ Our initial review of the bill identified a few provisions which could have significant implications for organizations’ compensation and incentive programs.

Elimination of 162m Exemptions for Deductibility of Performance‐Based Pay


Do Women CEOs Face Greater Shareholder Activism Compared to Male CEOs? A Role Congruity Perspective

Vishal Gupta is associate professor in the University of Alabama Culverhouse College of Commerce; Sandra Mortal is associate professor University of Alabama Culverhouse College of Commerce; Daniel B. Turban is Emma S. Hibbs/Harry Gunnison Brown Chair of Business and Economics and Professor of Management at the University of Missouri. This post is based on a recent article, forthcoming in the Journal of Applied Psychology, by Prof. Gupta, Prof. Mortal, Prof. Turban,  Seonghee Han, Assistant Professor of Finance at Pennsylvania State University at Abington, and Sabatino Silveri is Assistant Professor at the Fogelman College of Business and Economics at University of Memphis. 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) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

This article examines whether female CEOs face more threat of shareholder activism compared to male CEOs. Over the last two decades, there has been a gradual increase in the number of women CEOs, so that women now occupy 4.8% of CEO positions among Fortune 500 firms. The ascent of women to the CEO position has stimulated considerable interest in understanding their experiences in these roles (Glass & Cook, 2016). CEOs are responsible for managing the firm on behalf of shareholders, who are generally passive owners of stock in the firm. However, some shareholders attempt to redirect managerial decisions and advise managers on how they should lead the firm. Such shareholders are considered activist investors and are generally seen as a threat by management (Gantchev, 2013). To quote Herscher (2015), “activist investors are essentially there to say they think a company is not being run as well as it could be—in a very public way”. Not surprisingly, it is widely believed that on the issues and decisions that really matter for the firm, managers and activists are almost always on opposite sides (Gramm, 2016).


Impediments to Books and Records Demands

Christopher B. Chuff is an associate at Pepper Hamilton LLP. This post is based on a Pepper publication by Mr. Chuff, Joanna J. Cline, Douglas D. Herrmann, and James H.S. Levine, which originally appeared in the Delaware Business Court Insider.  This post is part of the Delaware law series; links to other posts in the series are available here.

A recent decision by the Delaware Court of Chancery, Mehta v. Kaazing, C.A. No. 2017-0087-JRS (Del. Ch. Sept. 29), confirms that stockholder demands to inspect corporate books and records based on the need to value a stockholder’s shares may be validly denied if the stockholder is unable to demonstrate that it has a “present” need to value its shares. Indeed, as the court makes clear, simply reciting a proper purpose, such as valuing one’s shares or investigating mismanagement, is not enough. To justify inspection, the stockholder must set forth the circumstances underlying its need for inspection and demonstrate that the stockholder has a need to inspect corporate books and records at the present time.


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