Monthly Archives: February 2018

How are Shareholder Votes and Trades Related?

Sophia Zhengzi Li is an assistant professor at Rutgers Business School and Miriam Schwartz-Ziv is an assistant professor at Michigan State University. This post is based on their recent paper.

In this paper we address several questions: Are shareholder votes a sufficient form of voice that catalyzes trades across the board? Are shareholders’ votes and trades correlated? And do shareholders update their trading patterns based on the information conveyed by other investors’ votes? We address these questions by examining the relation between votes and volume at the stock level, and the relation between mutual funds’ daily trades and their corresponding votes.


Perpetual Dual-Class Stock: The Case Against Corporate Royalty

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Jackson’s recent remarks at the UC Berkeley School of Law, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

My first few weeks at the SEC have been a whirlwind—and just to be clear, I am not talking about the markets. In a few short weeks, I have gotten a crash course on SEC policymaking—and enough reading to empathize with my former law students, who used to tell me, to my puzzlement, that my Corporate Law syllabus was not exactly beach material.

But in between the policy memos that come across my desk, I’ve also had the pleasure of working with my new colleagues on the SEC’s Staff. They’ve taught me a lot in a short time, and I’m grateful for their insights and assistance. The hard work and dedication of these folks gives me confidence that we are up to the challenge of making sure our financial markets are the safest, strongest, and most efficient in the world.


Effective Sexual Misconduct Risk Management

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Governance Insights article by Etelvina Martinez, Associate Vice President, ISS Corporate Solutions, a unit of Institutional Shareholder Services.

Four years ago, the Target data breach brought a spotlight on a “new” type of risk: cybersecurity. Of course, the risk wasn’t really new, but the scale of the breach, and the size of the public reaction, was the tipping point for many boards to recognize that they needed to manage cybersecurity risk at the board level. After all, the magnitude of the financial impact was certainly board-level; reports indicate that the 2013 data breach cost Target (and ultimately their shareholders) more than $100 million (after insurance recoupments and tax impacts).

Today, many boards find themselves in the same position yet again. High-profile sexual misconduct cases in the corporate setting are surfacing at a rapid pace, and many companies have not put effective sexual misconduct risk oversight mechanisms in place—particularly at the board level. And again, it’s not a “new” risk—rather, it’s a risk that, based on societal shifts, has now reached its own tipping point. With the growing tide of sexual harassment cases, boards of directors are challenged to broaden their notion of risk and redefine their roles in managing it.


Weekly Roundup: February 9–15, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 9–15, 2018.

The Enduring Allure and Perennial Pitfalls of Earnouts

Second Circuit Decision on Fraud-on-the-Market

FCPA Enforcement and Anti-Corruption Year in Review

Second Circuit’s Application of the Halliburton Doctrine

CEO Tenure Rates

High-Frequency Measures of Informed Trading and Corporate Announcements

Derivative Litigation and Stockholder Preclusion

Field Visits by Directors

Mutualism: Reimagining the Role of Shareholders in Modern Corporate Governance

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Stein’s recent remarks at Stanford University, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Tonight [Feb. 13, 2018], I want to talk to you about something that has been vigorously debated in recent years: What is, and what should be, the role of the corporate shareholder? In the spirit of being in California, this debate could be summarized as follows: Are shareholders merely extras in the corporate movie? Or are they lead actors that need to be empowered so that they can successfully play their roles? However, as most people in this room know, it is actually much more complicated than that. It is not, and should not be conceptualized as, a binary choice. Rather, I would posit that the entire corporate ecosystem’s success actually rests on effective communication and collaboration between corporations and their shareholders. When a company, its management, its shareholders, and its employees work together, companies tend to be more resilient and prosperous. In turn, this benefits companies, their corporate stakeholders, and the economy as a whole.


Field Visits by Directors

David R. Beatty, C.M., O.B.E. is Conway Director of the Clarkson Centre for Business Ethics & Board Effectiveness, and Professor of Strategic Management, at University of Toronto Rotman School of Management. This post is based on an excerpt from Mr. Beatty’s publication in the Winter 2017 edition of Rotman Management.

You can understand nothing, absolutely nothing, about the operating culture of any company by sitting around the boardroom table. At the boardroom table you “eat what you are fed” by the top management team.

A recent example is the Wells Fargo bank board. It turns out that some millions of fraudulent accounts were created over a decade and thousands of employees dismissed for failing to make targets. Did no bank director get any inkling of how the bank was run? Did any bank director ever visit a branch to have a chat with the branch manager? Did no one check the hot line? It is unbelievable that so many intelligent and seemingly conscientious men and women failed to understand the internal operating mechanics of the Wells Fargo business model.


Delaware M&A Lessons From 2017 and Outlook For 2018

Tariq Mundiya, Martin L. Seidel and Mary Eaton are partners at Willkie Farr & Gallagher LLP. This post is based on Willkie publication by Mr. Mundiya, Mr. Seidel, Ms. Eaton, Sameer Advani, and Jessica Sutton. This post is part of the Delaware law series; links to other posts in the series are available here.

Shareholder Activism

Shareholder activism continued to make headlines in 2017 with record amounts of capital spent targeting corporations, including Arconic, Procter & Gamble, ADP, General Motors, CSX Corporation, and Deckers Outdoor Corporation, among others. In some of these contests, activists pursued litigation. For example, Marcato Capital Management filed suit against the board of Deckers Outdoor Corporation in Delaware Chancery Court seeking to force the company to hold its annual shareholder meeting in December and eliminate expensive change-of-control “proxy penalties” in order to consider an alternative slate of director nominees. The board ultimately mooted the litigation by committing to hold its annual meeting as scheduled in December and deactivating the proxy penalties.


Time Is Money: The Link Between Over-Boarded Directors and Portfolio Value

Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (SBA). This post is based on a publication from the Florida SBA by Mr. McCauley; Jacob Williams, Corporate Governance Manager; and Tracy Stewart, Senior Corporate Governance Analyst.

The latest publication on corporate governance from the SBA analyzes the number of directorships at U.S. companies and its correlation with company stock performance. The investment study reviews “over-boarded” directors at U.S. companies within the Russell 3000 stock index and finds a strong inverse relationship between the level of directorships and total shareholder return (TSR) across the 1, 3, and 5 year time periods ending October 2017.


New Evidence, Proofs, and Legal Theories on Horizontal Shareholding

Einer Elhauge is the Petrie Professor of Law at Harvard Law School. This post is based on Professor Elhauge’s recent paper.

When the leading shareholders of horizontal competitors overlap, horizontal shareholding exists. In my initial Harvard Law Review article on horizontal shareholding (discussed on the Forum here), I showed that economic theory and two intra-industry studies indicated that high levels of horizontal shareholding in concentrated product markets can have anticompetitive effects, even when each individual horizontal shareholder has a minority stake. I argued that those anticompetitive effects could help explain longstanding economics puzzles, including executive compensation methods that inefficiently reward executives for industry performance, the historic increase in the gap between corporate profits and investment, and the recent rise in economic inequality. I also showed that when horizontal shareholding has likely anticompetitive effects, it can be remedied under Clayton Act §7.

In a new paper, I show that new proofs and new empirical evidence strongly confirm my economic claims. One new economic proof establishes that, if corporate managers maximize either their expected vote share or re-election odds, they will maximize a weighted average of their shareholders’ profits from all their stockholdings and thus will lessen competition the more that those shareholdings are horizontal, even if each horizontal shareholder has a minority stake. Another new economic proof shows that with horizontal shareholding, corporations maximize their shareholders’ interests by increasing the extent to which executive compensation is based on industry performance, rather than individual firm performance. Neither new proof requires any communication or coordination between different shareholders, between different managers, or between shareholders and managers.


2018 Proxy Season Preview

Steve W. Klemash is EY Americas Leader at the EY Center for Board Matters. This post is based on an EY publication by Mr. Klemash.

As boards and executives work to identify strategic opportunities and address shifting risk and business environments, institutional investors too are seeking to strengthen and protect their holdings for the long-term. With this in mind, investors are increasingly engaging with companies.

At the same time, the historically diverse priorities of the wide range of institutional investors appear to be aligning on key topics—board composition and environmental and social matters, in particular. Importantly, the shift in investor views is affecting their policies, and engagement and voting practices.


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