Monthly Archives: February 2018

BlackRock’s Call for Companies to Deliver Financial & Social Value

Abe M. Friedman is Chief Executive Officer of CamberView Partners, LLC. This post is based on a CamberView publication by Mr. Friedman, Krystal Gaboury BerriniChristopher A. Wightman, and Rob ZivnuskaRelated research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

On Tuesday, January 16th, BlackRock Chairman and CEO Laurence Fink released his annual letter to CEOs outlining a bold vision linking the prosperity of companies to their ability to deliver both financial performance as well as positive contributions to society. Entitled “A Sense of Purpose,” the letter highlights BlackRock’s increasingly active approach to shareholder engagement, its view that boards are central in the oversight of companies’ long-term strategic direction and what Mr. Fink believes is a connection between companies’ management of environmental, social and governance (ESG) risk factors and long-term value creation.


Dinner Table Human Capital and Entrepreneurship

Hans K. Hvide is professor of economics and finance at the University of Bergen; Paul Oyer is The Fred H. Merrill Professor of Economics at Stanford University. This post is based on their recent paper.

We document three new facts about entrepreneurship. First, a majority of male entrepreneurs start a firm in the same or a closely related industry as their fathers’ industry of employment. Second, this tendency is correlated with intelligence: higher-IQ entrepreneurs are less likely to follow their fathers. Third, an entrepreneur that starts a firm in the same 5-digit industry as where his father was employed tends to outperform entrepreneurs in the same industry whose fathers did not work in that industry. We consider various explanations for these facts and conclude that “dinner table human capital”, where children obtain industry knowledge through their parents, is an important factor behind what type of firm is started and how well it performs.


Federal Reserve Takes Severe and Unprecedented Action Against Wells Fargo: Implications for Directors of All Public Companies

Edward D. Herlihy, Richard K. Kim, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Mr. Herlihy, Mr. Kim, and Mr. Niles.

In a stinging rebuke, the Federal Reserve on February 2nd issued an enforcement action barring Wells Fargo from increasing its total assets and mandating substantial corporate governance and risk management actions. The Federal Reserve noted in its press release that Wells will replace three current board members by April and a fourth board member by the end of the year. In addition, the Federal Reserve released three supervisory letters publicly censuring Wells’ board of directors, former Chairman and CEO John Stumpf and a past lead independent director. These actions are a sharp departure from precedent, both in their severity and their public nature. They come on the heels of significant actions already taken by Wells, including appointing a former Federal Reserve governor as independent Chair and replacing a number of independent directors as well as its General Counsel.


Valuable Board Assessments

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP; George M. Anderson is Leader of Board Effectiveness Services at Spencer Stuart; and Paul DeNicola is Managing Director of the Governance Insights Center at PwC. This post is based on a PwC and Spencer Stuart publication by Ms. Loop, Mr. Anderson, Mr. DeNicola, and Barbara Berlin.

Board composition and performance continue to be under scrutiny by various stakeholders. Institutional investors are paying close attention to the individuals representing their interests in the boardroom, and how the board addresses its own succession. Hedge fund activists are also watching and certainly have not been shy about seeking change. And directors themselves are increasingly vocal about the performance of their peers. In fact, 46% of directors believe someone on their board should be replaced; 20% believe two or more directors should.


Underwriter Competition and Bargaining Power in the Corporate Bond Market

Alberto Manconi is Assistant Professor of Finance at Bocconi University; Ekaterina Neretina is a Ph.D. Student in Finance at Tilburg University and CentER; Luc Renneboog is Professor of Finance at Tilburg University and Research Associate at ECGI. This post is based on their recent paper.

The global bond market is a major source of corporate financing, and has been rapidly growing in recent years, reaching nearly $50 trillion in outstanding value as of 2013. At the same time, the bond underwriting industry has become increasingly more concentrated: In 2013, the ten largest underwriters had a combined market share of about 80%, up from 55% in 2000 and 30% in 1990. Industry practitioners as well as the press have raised concerns that this may give disproportionate power over the issuance process to a few large underwriters, enabling them to extract rents to the detriment of corporate bond issuers. In a recent paper, we address this concern and ask whether, and to what extent, underwriter power has an impact on corporate bond contracts.


FSOC Designation Treasury Report: A Fundamental Shift

George W. Madison and Michael E. Borden are partners and David A. Miller is an associate at Sidley Austin LLP. This post is based on a Sidley publication by Mr. Madison, Mr. Borden, and Mr. Miller.

Creating an inter-agency panel of financial regulators to monitor systemic risk was a hallmark achievement of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The Financial Stability Oversight Council (FSOC), as Dodd-Frank coined it, was designed to correct perceived deficiencies in regulation—many different regulators oversaw different pieces of the financial system but none had visibility into the activities of entities they did not regulate. Under Dodd-Frank, the FSOC, chaired by the Secretary of the Treasury, would exist to promote cooperation among more than fifteen regulators and formalize coordination. Dodd-Frank did not end “too big to fail” by shrinking the largest financial institutions. Rather, it intended to better regulate large, complex financial institutions [Dodd-Frank’s revisions to the financial regulatory landscape extend far beyond large financial institutions to include, for example, material changes to the regulation of banks of all sizes, consumer protection, and derivatives.], including by empowering FSOC to designate certain nonbank entities as systemically important financial institutions (SIFIs), subjecting these SIFIs to enhanced prudential oversight by the Federal Reserve. This powerful regulatory tool has engendered significant controversy ever since.


2017 Financial Stability Report

This post is based on the executive summary of the 2017 Financial Stability Report prepared by the Office of Financial Research.

The OFR’s Financial Stability Report presents our annual assessment of U.S. financial stability. The financial system is now far more resilient than it was at the dawn of the financial crisis 10 years ago. But new vulnerabilities have emerged.

Chapter 1 of the complete publication (available here) highlights three potential threats to financial stability: vulnerability to cybersecurity incidents, resolution risks at systemically important financial institutions, and evolving market structure. Chapter 2 concludes that overall financial stability risks remain in a medium range, although market risks are elevated.

In developing our financial stability assessment this year, we kept in mind that the United States has begun a two-year period of 10-year anniversaries of key events from the 2007-09 global financial crisis. Anniversaries encourage reflection on the events of the past, the reactions to those events, and the lessons learned. Anniversaries of massively disruptive events such as the crisis lead to hard questions: How does today differ? Are we better positioned to withstand the next crisis?


Compensation in the 2018 Proxy Season

Holly M. Bauer and Adam L. Kestenbaum are partners in, and Bradd L. Williamson is global Co-chair of, the Benefits, Compensation & Employment Practice at Latham & Watkins. This post is based on a Latham & Watkins publication by Ms. Bauer, Mr. Williamson, Mr. Kestenbaum, David T. Della Rocca, and James D.C. Barrall. Related research from the Program on Corporate Governance includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

2018 brings significant changes to the executive and director compensation landscape due to the passage of H.R. 1—informally known as the Tax Cuts and Jobs Act [1] (the TCJA)—the implementation of the CEO pay ratio disclosure rules, and a surprising court decision in Delaware regarding director compensation. These developments, along with the perennial proxy season compensation considerations, warrant new or renewed attention and may affect proxy disclosure or annual meeting agenda items.


Stock Market Evaluation, Moon Shots, and Corporate Innovation

Ming Dong is an associate professor of finance at York University Schulich School of Business; David Hirshleifer is Paul Merage Chair in Business Growth and professor of finance at University of California at Irvine Paul Merage School of Business, and a Research Associate at NBER; Siew Hong Teoh is Dean’s Professor of Accounting at University of California at Irvine Paul Merage School of Business. This post is based on their recent paper.

We test how stock market overvaluation affects corporate innovative activities and success. Under what we call the misvaluation hypothesis of innovation, firms respond to market overvaluation by engaging more heavily in innovative activities, resulting in higher future innovative output. We further argue that overvaluation encourages the most risky and creative forms of innovation (“moon shots”). We empirically test this hypothesis by relating measures of stock misvaluation to corporate innovative investment in the form of research and development (R&D), innovative output (measured by the number of patents and patent citations), and innovative inventiveness (measured by novelty, originality, and scope of patents and citations).


Weekly Roundup: January 26–February 1, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 26–February 1, 2018.

Corporate Governance Update: Boards, Sexual Harassment, and Gender Diversity

Points to Remember When Preparing Your Form 10-K

The Effects of Investment Bank Rankings: Evidence from M&A League Tables

Activism in 2018

Preparing a Successful IPO in 2018

A Long/Short Incentive Scheme for Proxy Advisory Firms

The Highest-Paid Boards

The Changing Face of Shareholder Activism

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