Monthly Archives: January 2018

Engagement—Succeeding in the New Paradigm for Corporate Governance

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 publication by Mr. Lipton, Steven A. RosenblumKaressa L. Cain, and Sabastian V. Niles.

The accelerated interest in sustainability, ESG, corporate social responsibility and investment for long-term growth and value creation (the new paradigm) as most cogently exemplified by Value Act’s newly formed Spring Fund focusing on promoting environmental and social goals of the companies in which it invests; by the promotion by the World Economic Forum of The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth; by the creation of the Investors’ Stewardship Group and its issuance of its principles for stewardship which embrace ESG and long-term investment; and, finally, by the policy positons of the three largest index fund managers, BlackRock, State Street and Vanguard as to what they expect in the way of governance and engagement, especially the January 12, 2018 letter from Larry Fink, BlackRock’s CEO, to the CEOs of the companies in which BlackRock invests in which “corporate purpose” is stressed, prompts us to update our January 2017 memo on engagement with investors.

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Doubling Down on Two-Degrees: The Rise in Support for Climate Risk Proposals

Cristina Banahan is an Advisor with ISS Corporate Solutions. This post is based on an publication by ISS, the parent company of ISS Corporate Solutions.

[Last week], BlackRock CEO Larry Fink released his annual letter to CEOs, an important signpost for investor priorities in the coming year. In his letter, titled “A Sense of Purpose,” Mr. Fink says:

“In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth.

The statement of long-term strategy is essential to understanding a company’s actions and policies, its preparation for potential challenges, and the context of its shorter-term decisions. Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change [emphasis added]—affect your potential for growth.”

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The Appraisal Landscape: Key Points, Open Issues, and Practice Points

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

In the second half of 2017, the Delaware Supreme Court issued two seminal decisions concerning appraisal—DFC Global v. Muirfield (Aug. 1, 2017) and Dell v. Magnetar (Dec. 15, 2017). These decisions are likely to accelerate the trends already developing in the recently changed landscape for appraisal actions. Below, we discuss (i) the key points arising from the decisions; (ii) the background of the cases; (iii) the likely practical effect of the decisions; (iv) open issues; and (v) related practice points.

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Common-Ownership Concentration and Corporate Conduct

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.

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Activist-Driven Dealmaking Falls Flat

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.

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Future Issues After the Publication of the CEO Pay Ratio

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.

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

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.

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The Strained Marriage of Public Debts and Private Contracts

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

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.

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Governance Gone Wild: Misbehavior at Uber Technologies

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.

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