Yearly Archives: 2018

Firm Level Decisions in Response to the Crisis: Shareholders vs. Other Stakeholders

Posted by Franklin Allen (Imperial College London), Elena Carletti (Bocconi University), and Yaniv Grinstein (IDC Herzliya), on
Tuesday, March 6, 2018
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Franklin Allen is Professor of Finance and Economics at Imperial College London; Elena Carletti is Professor of Finance at Bocconi University; and Yaniv Grinstein is Professor of Finance at IDC Herzliya. This post is based on their recent paper.

One of the interesting features of the 2008 financial crisis is the wide range of relationships between changes in a country’s output and changes in unemployment. Spain and Ireland had very large increases in unemployment despite quite different falls in output. This is perhaps not very surprising because both had significant construction industries that were devastated by the bursting of the property bubbles in both countries. More surprising is the fact that countries like Germany and Japan had much larger drops in output than the US but the effect on their unemployment rates was small.

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Freedom of Contract in LLCs

Posted by Jason Halper and James Fee, Cadwalader, Wickersham & Taft LLP, on
Tuesday, March 6, 2018
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Jason Halper is partner and James Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper and Mr. Fee, and is part of the Delaware law series; links to other posts in the series are available here.

On February 1, 2018, the Delaware Court of Chancery granted defendants’ motion to dismiss an action brought by minority unitholders of Trumpet Search, LLC (“Trumpet” or the “Company”). The defendants were other unitholders that collectively held a majority of the membership units in Trumpet and, under the governing operating agreement (“OA”), had the power to appoint four of the seven managers on the Trumpet board of directors. Vice Chancellor Glasscock’s decision, Christopher Miller et al. v. HCP & Co., et al., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018), is a powerful reminder that the broad freedom of contract that Delaware law accords entities such as LLCs offers both the promise of great latitude to contracting parties and the threat of serious pitfalls for parties that fail to carefully protect their interests in the agreement. The decision also underscores the limits on an implied covenant breach claim under Delaware law.

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SEC’s OCIE 2018 Areas of Focus

Posted by Daniel Nathan, Kenneth Herzinger, and Danielle Van Wert, Orrick, Herrington & Sutcliffe LLP, on
Tuesday, March 6, 2018
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Daniel Nathan and Kenneth Herzinger are partners and Danielle Van Wert is a senior associate at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Nathan, Mr. Herzinger, Ms. Van Wert, and Kristen Bartlett.

On February 7, 2018 the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2018 National Exam Priorities. The priorities, formulated with input from the Chairman, Commissioners, SEC Staff and fellow regulators, are mostly unchanged from years past (New Year, Similar Priorities: SEC Announces 2017 OCIE Areas of Focus). However, the publication itself is presented in a more formal wrapper that begins with a lengthy message from OCIE’s leadership team describing the Office’s role and guiding principles, including that they are risk-based, data-driven and transparent, and that they embrace innovation and new technology.

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Rethinking Corporate Law During a Financial Crisis

Posted by Yair Listokin and Inho Andrew Mun (Yale Law School), on
Monday, March 5, 2018
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Yair Listokin is the Shibley Family Fund Professor of Law at Yale Law School, and Inho Andrew Mun is a graduate of Yale Law School. This post is based on their recent article, forthcoming in the Harvard Business Law Review.

After each financial crisis, policy and academic discussions debate what went wrong with the law of financial regulation and how the law can be improved to prevent future crises. For instance, the Panic of 1907 prompted the establishment of the Federal Reserve (the “Fed”) as the lender of last resort. In response to the banking panic that led to the Great Depression, the Banking Act of 1933 created the Federal Deposit Insurance Corporation. And the two main regulatory responses to the Financial Crisis of 2008, the Dodd-Frank Act and the Basel III accords, largely focus on reforming the law of financial regulation to prevent the next crisis.

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Key Governance Issues—Ways for the Future

Posted by Christian Strenger (HHL Leipzig Graduate School of Management), on
Monday, March 5, 2018
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Christian Strenger is Academic Director at the Center for Corporate Governance at HHL Leipzig Graduate School of Management. This post is based on a publication by Mr. Strenger and Jörg Rochell, President and Managing Director at ESMT Berlin, for a symposium held in Berlin on November 9, 2017, sponsored by ESMT Berlin and the Center for Corporate Governance at HHL Leipzig Graduate School of Management.

In early November 2017, a group of senior representatives from leading investors, large companies, academia and regulators met for a roundtable symposium under Chatham House Rules to discuss particularly timely issues for the future of corporate governance.

The three introductory presentations of the moderators and the main results of the engaged discussions are set out below to provide relevant approaches for future-oriented solutions.

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UN Investor Summit Highlights

Posted by Andrew Letts and Chad Spitler, CamberView Partners, LLC, on
Monday, March 5, 2018
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Andrew Letts is Partner and Chad Spitler is a Senior Advisor at CamberView Partners, LLC. This post is based on a CamberView publication by Mr. Letts and Mr. Spitler. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Every two years, investors, executives and industry leaders gather at the United Nations for a unique summit on the state of climate risks and opportunities in the capital markets. This year’s convening of the UN Investor Summit on Climate Risk in late January took place in a dramatically different environment than the last meeting in 2016: the Paris Climate Agreement has been in effect for two years; the US government has shifted its policy on climate risk; shareholder support for climate proposals has never been higher; and some of the world’s largest investors have begun the process of divesting from carbon-intensive companies on the basis of long-term financial risk.

With that backdrop, the main storyline to emerge from this year’s conference was the pressing need for companies to be proactive in engaging with investors not just on how they are measuring and disclosing climate risk, but on how they are innovating to take advantage of the opportunities that are arising from this macroeconomic trend.

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Limited Liability and the Known Unknown

Posted by Michael Simkovic (USC Gould School of Law), on
Sunday, March 4, 2018
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Michael Simkovic is Professor of Law at the USC Gould School of Law. This post is based on a recent article by Professor Simkovic, forthcoming in the Duke Law Journal.

Limited liability is a double-edged sword. On the one hand, limited liability may help overcome investors’ risk aversion and facilitate capital formation and economic growth. On the other hand, limited liability is widely believed to contribute to excessive risk taking and externalization of losses to the public. Limited liability cannot eliminate risk. Limited liability can only transfer the adverse consequences of risk away from those who effectively decide how much risk to take and, in so doing, encourage greater risk taking and externalization of losses.

Although mechanisms such as regulation, mandatory insurance, and minimum capital requirements can help mitigate the externalization problem, risks must be well-understood by policymakers for these mechanisms to function properly. When risks are unknown or unknowable, all of the extant policy levers for addressing risk externalization are incomplete, have potentially undesirable side effects when applied broadly, or perform poorly.

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The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting

Posted by Torsten Jochem (University of Amsterdam), Tomislav Ladika (University of Amsterdam), Zacharias Sautner (Frankfurt School of Finance & Management), on
Saturday, March 3, 2018
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Torsten Jochem is Assistant Professor of Finance at the University of Amsterdam; Tomislav Ladika is Assistant Professor of Finance at the University of Amsterdam; and Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management. This post is based on their recent article, forthcoming in The Review of Financial Studies.

Demand for general human capital is rising across the economy, which makes it important to understand how firms can retain highly talented managers. One key retention mechanism is to defer parts of managers’ compensation into the future, by granting equity that does not vest for several years. Managers who voluntarily depart their firms typically forfeit unvested equity, which raises their cost of pursuing an outside option.

In our article, The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting, forthcoming in the Review of Financial Studies and publicly available on SSRN, we present novel evidence on the retention incentives of deferred compensation. We study how executive turnover changes following the sudden elimination of stock option vesting restrictions by means of a major regulatory change in the U.S., and document three findings. First, voluntary CEO turnover rises significantly when the amount of options forfeited upon leaving decreases. Second, these departures precipitate declines in firm value. Third, firms respond to turnover by raising the pay of remaining executives and newly hired CEOs, implying that departures allow firms to update their beliefs about executives’ outside options.

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The Misuse of Tobin’s Q

Posted by Robert Bartlett (UC Berkeley School of Law) and Frank Partnoy (University of San Diego School of Law), on
Friday, March 2, 2018
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Robert Bartlett is Professor of Law at UC Berkeley School of Law and Frank Partnoy is George E. Barrett Professor of Law and Finance at University of San Diego School of Law. This post is based on their recent paper.

In our paper, The Misuse of Tobin’s Q, which we recently posted to the Social Science Research Network, we examine the common and growing misuse of Tobin’s q as a proxy for firm value within the law and finance literatures.

For several decades, Tobin’s q has been one of the most important concepts in business law and policy for examining how various regulatory and corporate governance provisions affect firm value, and therefore economic welfare. More than three hundred law review articles, including many of the most widely-cited in corporate and securities law, have referenced Tobin’s q as a proxy for firm value, as have hundreds of articles in the most highly-regarded peer-reviewed finance and economics journals. The trend in citations to Tobin’s q is markedly upward, and in 2017 alone, articles in leading law reviews referenced Tobin’s q as a proxy for firm value in analyzing such important topics as how firm value was affected by hedge fund activism, fiduciary duties, staggered boards, and corporate governance.

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Regulating Proxy Advisors is Anticompetitive, Counterproductive, and Possibly Unconstitutional

Posted by Nell Minow, ValueEdge Advisors, on
Friday, March 2, 2018
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Nell Minow is Vice Chair of ValueEdge Advisors.

A party line vote in the House of Representatives approved H.R. 4015, [1] titled, with typical Capitol Hill oxymoronic newspeak the “Corporate Governance Reform and Transparency Act of 2017.” said in a statement that while proxy-advisory firms play an important role in advising clients. This bill is not just stupid and completely contrary to its stated purpose of promoting competition; it is probably unconstitutional.

The proxy advisory firms, led by ISS (which I helped to found in 1986 as its first general counsel, ran for one year and then left in 1990) and Glass-Lewis, analyze public company proxy issues like executive compensation and board effectiveness and make recommendations to their clients, large institutional investors like mutual funds and pension funds, suggesting votes for or against the proposals on the proxy card from corporate management and sometimes from other investors. I have observed this industry from the beginning, but left it 28 years ago. Since then, I have been a proponent and dissident who has failed to gain the support of the ISS analysts more often than I have been successful, and I have had the opportunity to develop some objectivity.

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