Yearly Archives: 2017

Remembering Rich Ferlauto

Posted by Stephen M. Davis, Harvard Law School, on
Thursday, June 29, 2017

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Stephen M. Davis is associate director of the Harvard Law School Programs on Corporate Governance and Institutional Investors, and a senior fellow at the Program on Corporate Governance. This post is based on remarks Professor Davis recently delivered at a memorial service for Rich Ferlauto. Ferlauto died this spring at the age of 60.

The memorial service for Rich Ferlauto was held on June 25, 2017 at Temple Rodef Shalom in Falls Church, Virginia. Ferlauto died May 8. He was most recently a co-founder of the 50/50 Climate Project, and a former deputy director of policy in the SEC’s office of investor education and advocacy. He was also a founder and leader of the AFL-CIO and AFSCME’s capital stewardship program.

“Can we talk?” That was Rich’s signature email—many in the corporate governance community got those, as I did over 20 years, all the time. Well, Rich could talk. Indeed he could talk to corporates, investors, politicians. When Congressman Barney Frank needed to strategize, Rich would be there. When Pfizer’s Peggy Foran needed to find a labor voice to explore solutions, Rich was there. When he talked to media, he could be scorching: “outrageous” was his favorite word when interviewed on the latest scandal, as Tom Croft has written. If boards failed to fix a problem, or the SEC failed to act, Rich would thunder in newspapers, radio and television, warning that “the outcry would be profound.” Rich was cunning with words; for instance, I remember him crafting the brilliant phrase ‘say on pay’ to describe investor votes on CEO compensation. He pioneered the powerful word ‘stewardship’ two decades before the concept was embraced by US shareowners. John Kennedy once said of Winston Churchill, “he mobilized the English language and sent it into battle.” So it was with Rich.

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The Increasing Evidence that Horizontal Shareholding Is Distorting Our Economy

Posted by Einer Elhauge, Harvard Law School, on
Thursday, June 29, 2017
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Einer Elhauge is the Petrie Professor of Law at Harvard Law School. This post is based on Professor Elhauge’s recent article.

Horizontal shareholding exists when major shareholders own stock in horizontal competitors. A year ago, I argued that such horizontal shareholding can have worrisome anticompetitive effects that help explain various puzzles about our economy (this article was discussed on the Forum here). In a new article, I show that new evidence both confirms my earlier conclusions and indicates the problem of horizontal shareholding is getting worse.

This new data reveals that horizontal shareholding levels have grown sharply in recent years. From 1999 to 2014, the odds that two competitors have a common shareholder with more than 5% of the stock of each of them rose from 16% to 90%. In other word, take any two random competitors, and the odds are now 90% that they each have a common major shareholder whose profits will suffer if the firms compete with each other for market share.

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“Captured Boards”: The Rise of “Super Directors” and the Case for a Board Suite

Posted by Kobi Kastiel, Harvard Law School, and Yaron Nili, University of Wisconsin, on
Wednesday, June 28, 2017
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Kobi Kastiel is a Research Director of The Project on Controlling Shareholders at the Harvard Law School Program on Corporate Governance, and Yaron Nili is Assistant Professor at University of Wisconsin Law School. This post is based on their recent article, published in the Wisconsin Law Review.

In October 1972, former Supreme Court Justice Arthur Goldberg resigned from his seat as a director of Trans World Airlines. In a New York Times article published afterward, he expressed his frustration, stating that: “[t]he outside director is simply unable to gather enough independent information to act as a watchdog or sometimes even to ask good questions. When presented with the agenda of the board meeting, the director is not basically equipped to provide any serious input into the decision. Realistically, it has already been made by management.”

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The Financial CHOICE Act and the Debate Over Shareholder Proposals

Posted by Joseph A. Hall, Davis Polk & Wardwell LLP, on
Wednesday, June 28, 2017
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Joseph A. Hall is a partner at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Hall. Additional posts on the CHOICE Act are available here.

A lively debate is erupting over a provision in the House-approved Financial CHOICE Act that would increase the stock ownership threshold for submitting shareholder proposals in the company’s proxy statement from the current level of $2,000 to 1% of common stock outstanding, and would extend the stockholding duration requirement from one year to three years.

The New York State Comptroller, who manages $186 billion in retirement funds but whose ownership of any particular company is often less than 1%, called it “outrageous and inequitable that we would not be able to make requests of corporate boards through shareholder resolutions.” Other critics of the proposed change have pointed out that even investors with small holdings can have good ideas, and the Wall Street Journal quoted an asset manager’s view that “Shareholder proposals provide an early warning of risks a company may not be aware of, as well as an opportunity to gauge investor sentiment on a wide range of issues.”

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Federal Bill Attempts to Silence Investors

Posted by Gianna McCarthy and George Wong, New York State Office of the Comptroller, on
Tuesday, June 27, 2017
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Gianna McCarthy is Director of Corporate Governance and George Wong is ESG Integration Manager at the New York State Office of the Comptroller. This post is in response to a recent statement issued by New York State Comptroller Thomas P. DiNapoli and New York City Comptroller Scott Stringer. Additional posts on the CHOICE Act are available here.

A broad coalition of state fiduciaries joined New York State Comptroller Thomas P. DiNapoli and New York City Comptroller Scott Stringer [on June 6, 2017] in issuing a Joint Statement on Defending Fundamental Shareowner Rights in strong support of the use of shareholder proposals as an essential tool in maintaining corporate transparency and accountability. The Statement is in response to provisions of the Financial CHOICE Act, legislation pending in the U.S. House of Representatives, which would effectively prohibit most investors from filing shareholder proposals.

“This Act attempts to silence investors, large and small, who seek a vote on corporate action that could put our investments at risk and diminish corporate accountability,” DiNapoli said. “Publicly-owned companies are responsible to their shareholders, but this Act is trying to overturn that core principle by allowing only a select few of the largest investors to question corporate behavior.”

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Ten Questions Every Board Should Ask in Overseeing Cyber Risks

Posted by Yafit Cohn and Karen Hsu Kelley, Simpson Thacher & Bartlett LLP, on
Tuesday, June 27, 2017
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Yafit Cohn is counsel and Karen Hsu Kelley is a partner at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher-Nasdaq co-publication by Ms. Cohn and Ms. Kelley.

Those who work in the cybersecurity industry believe that there are two types of companies in the United States: “those that have been hacked and those that don’t know they’ve been hacked.” [1] Indeed, more and more companies are experiencing data breaches, and it seems that hardly a week goes by without a data breach reported in the headlines.

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Just How Iron-Clad are Contractual Rights to Payment On Preferred Stock of a Solvent Company?

Posted by John A. Bick, Davis Polk & Wardwell LLP, on
Tuesday, June 27, 2017
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John A. Bick is a partner at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Bick, Louis L. Goldberg, and Richard D. Truesdell, Jr. This post is part of the Delaware law series; links to other posts in the series are available here.

Minority equity investments in public companies are on the rise. These are often structured as an investment in convertible preferred stock to give the investor a senior position to other equity while preserving equity upside through the ability to convert to common stock.

This trend is likely sparked by a search for higher yield than is afforded by an investment in debt in a low interest rate environment, less appetite for “big ticket” full buyouts, and the attractiveness to issuers of not using up their permitted debt baskets or leveraging their balance sheet.

While the investor is willing to give up the seniority of a debt position, it is still keenly focused on optimizing its right to receive repayment of its preferred investment on the contractually stipulated redemption date and to receive its contractually stipulated dividends on each dividend payment date.

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Below-the-Merger-Price Appraisal Results and the SWS Decision

Posted by Gail Weinstein, & Philip Richter, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Monday, June 26, 2017
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Gail Weinstein is senior counsel and Philip Richter is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Richter, Steven Epstein, Robert C. Schwenkel, Warren S. de Wied, and Scott B. Luftglass. This post is part of the Delaware law series; links to other posts in the series are available here.

In In re Appraisal of SWS Group Inc. (May 30, 2017), the Delaware Court of Chancery, relying on a discounted cash flow analysis, determined that the appraised “fair value” of SWS Group, Inc. (the “Company”) was below the merger price paid by acquiror Hilltop Holdings, Inc. The court’s determination of fair value was 7.8% below the value of the merger consideration at closing (about 19% below the value of the merger consideration at the time the merger agreement was announced and the hedge-fund petitioners decided to acquire their SWS shares).

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Is Board Compensation Excessive?

Posted by Mustafa A. Dah, Lebanese American University and Melissa B. Frye, University of Central Florida, on
Monday, June 26, 2017
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Mustafa A. Dah is an Assistant Professor of Finance at the Lebanese American University and Melissa B. Frye is an Associate Professor of Finance at the University of Central Florida. This post is based on a recent article by Professor Dah and Professor Frye.

In our article, Is Board Compensation Excessive? (forthcoming in the Journal of Corporate Finance), we examine whether board members are overpaid. We also consider whether excessive compensation of directors affects their ability to monitor. We address these issues by carefully constructing a model to predict director compensation. We then identify the presence and magnitude of over- and undercompensation and examine whether superfluous director compensation affects the directors’ monitoring incentives.

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Déjà Vu: Model Risks in the Financial Choice Act

Posted by Beckwith B. Miller and Howard R. Sutherland, Ethics Metrics LLC, on
Sunday, June 25, 2017
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Beckwith B. Miller is a Managing Member and Howard R. Sutherland is a Member of the Advisory Board at Ethics Metrics LLC. This post is based on an Ethics Metrics publication by Mr. Miller and Mr. Sutherland. Additional posts on the CHOICE Act are available here.

On June 8, 2017, the Financial Choice Act of 2017 was passed by the House of Representatives, following a CBO analysis dated May 10, 2017. But both the CBO analysis and the House bill fail to address model risks for depository institution holding companies (DIHCs) that date back to 1999 and the creation of large financial holding companies (FHCs) under the Gramm-Leach-Bliley Act.

Those unaddressed model risks reflect material information (MI) that is classified as confidential supervisory information (CSI) by federal bank regulations, and consequently is intentionally omitted from public disclosure for large DIHCs—although it is disclosed for small DIHCs. The result is a bifurcated and inefficient market for large DIHCs (total assets above $10 billion) with low default rates but a highly efficient and brutal market with high default rates for small DIHCs (total assets below $10 billion). Undisclosed MI includes formal enforcement actions (FEAs) targeting violations of safety and soundness, source of strength and the well-managed requirement.

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