Yearly Archives: 2018

Further to the Warren Bill, The New Paradigm and a Better Way

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Thursday, August 23, 2018
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

I’ve received a number of comments essentially raising the question, “If you are such a strong supporter of stakeholder corporate governance, how can you not favor Senator Warren’s Bill?” As I said in both of my previous memos, Corporate Governance; Stakeholder Primacy; Federal Incorporation, August 15, 2018 (discussed on the Forum here), and Corporate Governance—The New Paradigm—A Better Way Than Federalization, August 17, 2018 (discussed on the Forum here), I reject federalization of all large corporations as too high a price to pay for stakeholder governance—particularly when it would do little to deter attacks by activist hedge funds. There are innumerable advantages to continued state incorporation and state corporate law that should not be sacrificed. My solution is the private sector solution advocated by the World Economic Forum, The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth. Growing support for The New Paradigm, as noted in my August 17 memo, would lead to it being the solution.

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Shareholder Activism: Evolving Tactics

Posted by Shaun J. Mathew and Daniel E. Wolf, Kirkland & Ellis LLP, on
Thursday, August 23, 2018
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Shaun J. Mathew and Daniel E. Wolf are partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis memorandum by Mr. Mathew and Mr. Wolf. 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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Shareholder activist tactics are evolving as hedge funds deploy capital in a market where much of the low-hanging fruit has been plucked and target companies are more aware and better defended against traditional strategies. New approaches are also being deployed by first-time and infrequent activists who don’t always operate from the typical activist playbook. Companies should be aware of these strategy shifts and be prepared to be flexible in defending against new and novel approaches:

More demands for board control. Not satisfied with a “short slate” of one or two board seats, more activists are demanding board control, including by nominating a full slate of replacement directors. Control contests are harder for activists to win, but success also comes with a higher payoff: rather than just being a voice in the boardroom, control gives the activist the ability to more rapidly implement an agenda (e.g., Xerox terminated its deal with Fuji as part of its settlement giving control to Icahn and Deason). Activists are also using the threat of a contest for board control as a bargaining chip to extract better “short slate” settlement terms, safe in the knowledge that the activist retains the option to cut back its nominations to a minority slate during the course of the proxy contest. While this gambit risks undermining an activist’s credibility with shareholders and proxy advisory firms, we expect to see it used more, particularly by less experienced funds.

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Board Diversity, Firm Risk, and Corporate Policies

Posted by Gennaro Bernile (University of Miami) Vineet Bhagwat (George Washington University), and Scott E. Yonker (Cornell University), on
Thursday, August 23, 2018
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Gennaro Bernile is Associate Professor of Finance at the University of Miami; Vineet Bhagwat is Assistant Professor at George Washington University; and Scott Yonker is Associate Professor & Lynn Calpeter Faculty Fellow in Finance at Cornell University Dyson School of Applied Economics and Management. This post is based on their article, recently published in the Journal of Financial Economics.

In the last decade, at least six countries have mandated gender diversity on corporate boards and several other are considering legislation. As a result, there are many studies that investigate the impact of gender diversity of the board of directors on corporate performance. While gender diversity is important from a social equity perspective, is it the most important aspect of diversity when it comes group outcomes? Recently, Harvard University defended its admissions process against allegations of racial discrimination based, in part, on the idea that diverse student bodies produce better educational outcomes. Rakesh Khurana, the dean of Harvard College, stated, “That when we talk about diversity of backgrounds and experiences, it includes different academic interests. It includes different occupations of parents. It includes socioeconomic differences. It includes different viewpoints on issues.” Khurana, an economist by training, understands that while diversity in gender and race may be important from a social equality perspective, it is diversity in ideas, beliefs, and expertise that should also be important for group outcomes and performance. In our recent article, Board Diversity, Firm Risk, and Corporate Policies, published in the Journal of Financial Economics, we ask whether diversity in the board of directors affects corporate risk-taking, performance, and other policies, but we take a much broader approach than previous researchers, defining diversity along numerous demographic and cognitive dimensions.

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Statement on Investor Roundtables Regarding Standards of Conduct for Investment Professionals Rulemaking

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Wednesday, August 22, 2018
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Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement, available here. 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.

In April 2018, the Commission proposed for public comment a significant rulemaking package designed to serve our Main Street investors that would (1) require broker-dealers to act in the best interest of their retail customers, (2) reaffirm and in some cases clarify the fiduciary duty owed by investment advisers to their clients and (3) require both broker-dealers and investment advisers to clarify for all retail investors the type of investment professional they are, and disclose key facts about their relationship.

Shortly after we issued our proposal, we organized a series of roundtables to provide Main Street investors from around the country the opportunity to “Tell Us” about their experiences and their views of what they expect from their investment professionals.

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National Bank Charters for Fintech Firms

Posted by Arthur S. Long, Jeffrey L. Steiner, and James O. Springer, Gibson, Dunn & Crutcher LLP, on
Wednesday, August 22, 2018
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Arthur S. Long is a partner, Jeffrey L. Steiner is counsel, and James O. Springer is an associate at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum.

Last week, the Office of the Comptroller of the Currency (OCC) announced that it would begin accepting proposals from Fintech firms to charter special purpose national banks (SPNBs). This decision comes over 18 months after the White Paper proposing such charters was issued under President Obama’s Comptroller, Thomas Curry, in his last month in that position. The OCC accompanied this announcement with a policy statement (Policy Statement) and a supplement to its licensing manual for national banks (Licensing Manual Supplement).

This announcement, while expected, is an extremely significant development in federal banking law, and one almost assuredly to be legally challenged, at a time when the Chevron doctrine of administrative agency deference is receiving a fresh look.

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Dual-Class Index Exclusion

Posted by Andrew Winden (Stanford University) and Andrew Baker (Stanford University), on
Wednesday, August 22, 2018
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Andrew Winden is a Fellow at the Rock Center for Corporate Governance at Stanford University and Andrew C. Baker is a Doctoral candidate in Accounting at the Stanford Graduate School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

One of the most contentious and long-standing debates in corporate governance is whether company founders and other insiders should be permitted to use multi-class stock structures with unequal votes to control their companies while seeking capital through a public listing. Institutional investors have lobbied Congress, state legislatures and the Securities Exchange Commission unsuccessfully for decades to prohibit such stock structures. Following competitive pressure from the American Stock Exchange and NASDAQ, the New York Stock Exchange changed its listing rules to permit such structures in 1984. In the increasingly competitive global environment for listings, other stock exchanges have also started permitting multi-class listings.

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Corporate Governance in Emerging Markets

Posted by Ruth V. Aguilera (Northeastern University) and Ilir Haxhi (University of Amsterdam), on
Tuesday, August 21, 2018
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Ruth V. Aguilera is Professor at the D’Amore-McKim School of Business at Northeastern University; and Ilir Haxhi is Assistant Professor of Strategy and Corporate Governance at the University of Amsterdam. This post is based on their recent article, forthcoming as a chapter in the Oxford Handbook on Management in Emerging Markets (Eds.) R. Grosse & K. Meyer, Oxford University Press.

Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

This essay belongs to an edited book dedicated to management in emerging markets. In our chapter, we adopt a systematic cross-national comparative approach to provide an overview of corporate governance (CG) in emerging markets (EMs). Our focus is mostly on the BRIC countries (Brazil, Russia, India, and China). We begin by highlighting the importance of better understanding CG in EMs, and identifying some of the key challenges these countries face as they seek to enhance their CG. Second, we review managerial research conducted after the year 2000 on CG in EMs in the following four categories: ownership, boards of directors, top management teams (TMTs), and CG practices and reform. We discuss the main research questions and findings from this collective body of work, which tends to be “siloed” in terms of drawing few cross-national comparisons. Third, we offer an overview of the main CG features of each of the BRIC countries relative to one another, taking on the OECD Guidelines of CG as its benchmark framework. To do so, we address core governance areas related to the overall model of CG, ownership types and ownership rights, information disclosure and reporting, and stakeholder management and corporate social responsibility. Finally, we conclude by highlighting common themes for CG in emerging markets and suggesting fruitful areas for future research.

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Board Diversity Developments

Posted by Arthur H. Kohn, Elizabeth K. Bieber, and Maria I. Maldonado, Cleary Gottlieb Steen & Hamilton LLP, on
Tuesday, August 21, 2018
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Arthur H. Kohn is partner and Elizabeth K. Bieber and Maria I. Maldonado are associates at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Kohn, Ms. Bieber, and Ms. Maldonado.

Over the last few years, boards have come under mounting pressure to focus on board composition and refreshment, including length of tenure, individual and aggregate skills mix and diversity. A few years ago, CalPERS’ revised its Global Governance Principles to call for companies to conduct rigorous evaluations of director independence after twelve years’ service, and ISS’ QualityScore metric rewards companies where the proportion of non-executive directors with fewer than six years tenure makes up more than one-third of the board, in addition to scrutinizing boards where average tenure exceeds 15 years. Companies also face demands to justify the contributions of individual directors and to conduct rigorous evaluations to ensure that the board functions effectively and with the right mix of skills. Correspondingly, refreshment is one of the top areas of continued governance focus from other investors and advocates. This update is intended to provide boards with data that brings them up to date on developments in this area, since it is certain to be an area of continuing focus for various constituencies in the near future.

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Corporate Governance—The New Paradigm: A Better Way Than Federalization

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Monday, August 20, 2018
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton. 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) and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

While “The Accountable Capitalism Act” introduced last week by Senator Elizabeth Warren contains several very worthwhile provisions, it is premised on the federalization of all public corporations with revenues in excess of $1 billion. Mandatory federal incorporation and the creation of a federal office to make regulations and supervise compliance would be a major incursion into state corporation law. It is reminiscent of proposals by Ralph Nader some half-century ago to achieve control of major corporations by mandatory federal incorporation. Warren’s proposal should not receive any more support than Nader’s. However, like Nader’s proposal led to significant changes in environment regulation, Warren’s will likely lead to major changes to the relationship between corporations and the institutional investors and asset managers who control them.

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Federal FinTech Bank Charters

Posted by Lee Meyerson, Keith Noreika, and Adam Cohen, Simpson Thacher & Bartlett LLP, on
Monday, August 20, 2018
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Lee Meyerson and Keith Noreika are partners and Adam Cohen is counsel at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Meyerson, Mr. Noreika, Mr. Cohen, and Spencer Sloan.

On July 31, the Office of the Comptroller of the Currency (OCC) announced that it will begin accepting applications for limited-purpose national bank charters formed to provide nondepository financial technology, or “fintech,” bank products and services. [1] The federal charter will largely allow fintech businesses to operate nationwide under a single set of national standards, without needing to seek state-by-state licenses or joining with brick-and-mortar banks. This announcement follows efforts by prior Comptrollers of the Currency to develop a fintech charter, [2] and coincides with the publication of a report by the U.S. Department of Treasury that encourages the OCC’s consideration of applications for fintech charters. [3]

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