Yearly Archives: 2018

Common-Ownership Concentration and Corporate Conduct

Posted by Martin C. Schmalz (University of Michigan), on

Tuesday, January 23, 2018

Antitrust, Common ownership, Diversification, Incentives, Institutional Investors, Market efficiency, Ownership, Peer groups, Securities regulation
More from: Martin Schmalz

Martin C. Schmalz is Assistant Professor of Finance at the University of Michigan Ross School of Business. This post is based on a recent paper by Professor Schmalz. Related research from the Program on Corporate Governance includes Horizontal Shareholding (discussed on the Forum here) and The Growing Problem of Horizontal Shareholding (discussed on the Forum here), both by Einer Elhauge; and The Agency Problems of Institutional Investors, by Lucian Bebchuk, Alma Cohen, and Scott Hirst.

A fast-growing literature in finance and industrial organization studies whether and how “common ownership” links affect firm behavior and market outcomes. A new forthcoming paper, available on SSRN, reviews the rich history of thought on this topic. In addition to connecting the existing contributions in the economics and finance literature, the review also points to previous contributions in antitrust law, and offers ideas for future research.

Conceptually, the literature revolves around the question of what is the objective of the firm. Harvard’s Oliver Hart pointed out in the late 1970s that unless firms are price takers or all shareholders have their wealth concentrated in a single firm—and no other interests—shareholders don’t generally agree that the firm’s optimal strategy is to maximize its own value.

Activist-Driven Dealmaking Falls Flat

Posted by David A. Katz and William Savitt, Wachtell, Lipton, Rosen & Katz, on

Monday, January 22, 2018

Hedge funds, Insider trading, Institutional Investors, Merger litigation, Mergers & acquisitions, Securities enforcement, Securities litigation, Securities regulation, Settlements, Shareholder activism, Tender offer
More from: David Katz, William Savitt, Wachtell Lipton

David A. Katz and William Savitt are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Mr. Katz and Mr. Savitt. 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 Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

Stockholder plaintiffs recently entered into a $290 million settlement in connection with federal securities litigation arising out of Valeant Pharmaceuticals’ failed attempt to acquire Allergan. Activist hedge fund Pershing Square agreed to pay $193.75 million of the settlement in connection with its scheme to deliver Allergan into Valeant’s hands. In 2014, Valeant informed Pershing Square of its intention to make a tender offer for Allergan. Armed with this knowledge, Pershing Square acquired a substantial position in Allergan. Valeant then went public with its offer and Allergan’s share price predictably spiked. Pershing Square made over a billion dollars on the trade and Valeant “warehoused” a large prearranged block of support for its hostile bid.

Future Issues After the Publication of the CEO Pay Ratio

Posted by Joe Mallin, Pay Governance LLC, on

Monday, January 22, 2018

Compensation ratios, Dodd-Frank Act, Executive Compensation, Information environment, Management, Proxy season, Securities regulation, Stakeholders
More from: Joe Mallin, Pay Governance

Joe Mallin is Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Mallin.

As we approach the 2018 proxy season, a key change for companies will be the first publication of the CEO Pay Ratio as mandated by the Dodd-Frank Act of 2010. Companies will begin publishing CEO Pay Ratios in proxy statements in early 2018.

Much has been written about the details of calculating the Ratio as well as potential employee reactions to employer-published Ratios. This post attempts to take a different perspective, focusing on the potential views of several interested parties, including employees, investors, and the media. As such, we try to forecast company outcomes and issues likely to come about in mid-2018 after the Spring’s proxy statement publications. In addition, we suggest methods to address those issues as the CEO Pay Ratio makes its initial splash in the business world.

The Option to Quit: The Effect of Employee Stock Options on Turnover

Posted by Serdar Aldatmaz (George Mason University), Paige Ouimet (University of North Carolina at Chapel Hill), and Edward Dickersin Van Wesep (University of Colorado at Boulder), on

Monday, January 22, 2018

Behavioral finance, Equity-based compensation, Incentives, Stock options
More from: Edward Van Wesep, Paige Ouimet, Serdar Aldatmaz

Serdar Aldatmaz is Assistant Professor of Finance at the George Mason University School of Business; Paige Ouimet is Associate Professor of Finance at The University of North Carolina at Chapel Hill Kenan-Flagler Business School; and Edward Dickersin Van Wesep is an Associate Professor of Finance at the University of Colorado at Boulder Leeds School of Business. This post is based on their recent paper.

Firms employing highly skilled workers bear substantial direct and indirect costs when those workers quit. Hiring is expensive and departing workers can take institutional knowledge and intellectual property with them. These costs were high enough to induce Google, Apple, and other Silicon Valley firms to illegally collude not to hire each other’s workers, ultimately leading to a class-action lawsuit and a $415 million settlement in 2015. Turnover matters.

The Strained Marriage of Public Debts and Private Contracts

Posted by Anna Gelpern (Georgetown University), on

Sunday, January 21, 2018

Argentina, Bankruptcy, Bondholders, Bonds, Contracts, Debt, Debt contracts, Debtor-creditor law, ECB, Financial regulation, International governance, Private ordering, Public interest, Sovereign debt, Stakeholders
More from: Anna Gelpern

Anna Gelpern is a Professor at Georgetown University Law Center. This post is based on a recent article by Professor Gelpern, forthcoming in Current History.

A casual observer of recent policy debates might reasonably conclude that sovereign debt crises of the sort that have ravaged Argentina, Greece, Ukraine, and Venezuela would be less frequent and less damaging if only debtors and creditors could tweak a few words in their bond contracts. Contract reform got a boost from successful enforcement litigation against Argentina in the United States. The government’s 2001 default helped make coordinated change in standardized bond terms the consensus alternative to controversial sovereign bankruptcy proposals: it was elegant, pragmatic, and inoffensive by comparison. More than a decade later, enforcement against Argentina hinged on a single clause, blocked payments to cooperating creditors, and netted some holdouts more than ten times their original investment by 2016. The message could not be clearer: change the clause, fix the problem. READ MORE »

Remarks on Shareholder Engagement

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on

Saturday, January 20, 2018

Agency costs, Capital allocation, Capital markets, Economic alignment, Engagement, Incentives, Information environment, Institutional Investors, Retail investors, SEC, Securities regulation, Shareholder activism, Shareholder value, Shareholder voting
More from: Jay Clayton, U.S. Securities and Exchange Commission

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at the SEC-NYU Dialogue on Securities Markets . 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. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst.

This is now the fourth in the series of SEC-NYU dialogues, and I am pleased with the four topics that have been covered, as well as the quality of the discussions thus far. It is important that the SEC be able to take a forward-looking approach with respect to our securities markets—to keep up to date with key developments, and be alert to issues where regulation may be appropriate in the future. Hearing about new developments or theories—whether they require us to take specific action or not—is an important part of that process. At the end of the day, our ability to spot growing issues and head them off with thoughtful, informed, incremental regulation, or deregulation, will always be preferable to addressing problems retrospectively, including through enforcement.

Governance Gone Wild: Misbehavior at Uber Technologies

Posted by David F. Larcker and Brian Tayan (Stanford University), on

Saturday, January 20, 2018

Boards of Directors, Compliance & ethics, Corporate culture, Cybersecurity, Incentives, Management, Misconduct, Reputation, Risk management, Risk oversight, Tech companies, Uber
More from: Brian Tayan, David Larcker

David F. Larcker is James Irvin Miller Professor of Accounting and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on their recent paper.

We recently published a paper on SSRN, Governance Gone Wild: Epic Misbehavior at Uber Technologies, that evaluates governance and leadership challenges through the example of the private ride-sharing startup Uber.

Despite its importance, there is surprisingly little consensus among researchers about the organizational attributes that are critical for “good” corporate governance. Research generally shows that the structural features of a governance system—the size and structure of the board and the implementation of so-called best practices for audit, risk, compensation, and succession—do not have a reliable (positive or negative) impact on firm performance and outcomes. Some research finds that the human elements of governance—such as leadership, culture, and tone from the top—do influence outcomes, but these are difficult to measure and assess with accuracy.

Letter from JANA Partners & CalSTRS to Apple, Inc.

Posted by Anne Sheehan, California State Teachers' Retirement System, on

Friday, January 19, 2018

Accountability, Boards of Directors, Corporate Social Responsibility, Hedge funds, Institutional Investors, Long-Term value, Pension funds, Shareholder activism, Short-termism, Tech companies
More from: Anne Sheehan, CalSTRS

Anne Sheehan is Director of Corporate Governance at the California State Teachers’ Retirement System (CalSTRS). This post is based on the recent joint shareholder letter from JANA Partners LLC and CalSTRS to the Board of Apple, Inc.

JANA Partners LLC and the California State Teachers’ Retirement System (“we” or “us”) collectively own approximately $2 billion in value of shares of Apple Inc. (“Apple” or “you”). As shareholders, we recognize your unique role in the history of innovation and the fact that Apple is one of the most valuable brand names in the world. In partnership with experts including Dr. Michael Rich, founding director of the Center on Media and Child Health at Boston Children’s Hospital/Harvard Medical School Teaching Hospital and Associate Professor of Pediatrics at Harvard Medical School, and Professor Jean M. Twenge, psychologist at San Diego State University and author of the book iGen, we have reviewed the evidence and we believe there is a clear need for Apple to offer parents more choices and tools to help them ensure that young consumers are using your products in an optimal manner. By doing so, we believe Apple would once again be playing a pioneering role, this time by setting an example about the obligations of technology companies to their youngest customers. As a company that prides itself on values like inclusiveness, quality education, environmental protection, and supplier responsibility, Apple would also once again be showcasing the innovative spirit that made you the most valuable public company in the world. In fact, we believe that addressing this issue now will enhance long-term value for all shareholders, by creating more choices and options for your customers today and helping to protect the next generation of leaders, innovators, and customers tomorrow.

The Significance for Boards and Managements of the JANA/CalSTRs Letter to Apple

Posted by Ethan A. Klingsberg, Cleary Gottlieb Steen & Hamilton LLP, on

Friday, January 19, 2018

Boards of Directors, CalSTRS, Corporate Social Responsibility, ESG, Hedge funds, Institutional Investors, Pension funds, Shareholder activism, Shareholder proposals, Shareholder voting
More from: Ethan Klingsberg, Cleary Gottlieb

Ethan A. Klingsberg is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here) and Who Bleeds When the Wolves Bite? By Leo E. Strine, Jr. (discussed on the Forum here).

Over the past couple of years, we have seen traditional, actively managed funds, such as Neuberger Berman, borrow activist tactics and push for changes to accelerate increases in share prices. In parallel with this arguable trend toward convergence between actively managed funds and activist funds, a chasm appeared to be developing elsewhere in the investor landscape as pension and passive strategy funds increasingly focused on “social good” issues, while brand name activist funds remained primarily focused on nearer term financial performance and returns. But the activists desperately need the support of the pension and passive strategy funds, as evidenced by the proxy contests over the past year where support from these funds was neither predictable nor easily locked up. The announcement on January 6, 2018 by JANA Partners, a high profile activist fund, and CalSTRs, an outspoken pension fund, that they have teamed up to accumulate a $2 billion equity position in Apple for the purpose of launching a specific “social good” campaign is the strongest indication to date that the magnitude of assets under management focused on social good matters cannot be ignored and that even a successful activist fund like JANA needs to burnish its reputation in this area.

Weekly Roundup: January 12–18, 2018

Posted by HLS Forum on Corporate Governance and Financial Regulation, on

Friday, January 19, 2018

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of January 12–18, 2018.

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Yearly Archives: 2018

Common-Ownership Concentration and Corporate Conduct

Activist-Driven Dealmaking Falls Flat

Future Issues After the Publication of the CEO Pay Ratio

The Option to Quit: The Effect of Employee Stock Options on Turnover

The Strained Marriage of Public Debts and Private Contracts

Remarks on Shareholder Engagement

Governance Gone Wild: Misbehavior at Uber Technologies

Weekly Roundup: January 12–18, 2018

Busy Directors and Shareholder Satisfaction

What the New Tax Rules Mean for M&A

Paying for Performance in Private Equity: Evidence from VC Partnerships

Remarks at the Inaugural Meeting of the Fixed Income Market Structure Advisory Committee

Strict Supervision, Bank Lending and Business Activity

What Do Investors Ask Managers Privately?

How Transparent are Firms about their Corporate Venture Capital Investments?

2017 Year in Review: Securities Litigation and Regulation

Delaware’s Prudent Approach to the Cleansing Effect of Stockholder Approval

Changes in ISS 2018 Compensation FAQs

Network Effects in Corporate Governance

Remarks at Ceremonial Swearing In of Commissioners Hester M. Peirce and Robert J. Jackson, Jr.

A Sense of Purpose

The New Digital Wild West: Regulating the Explosion of Initial Coin Offerings

BlackRock Supports Stakeholder Governance

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