Monthly Archives: June 2018

Cost of Experimentation and the Evolution of Venture Capital

Michael Ewens is Associate Professor of Finance and Entrepreneurship at the California Institute of Technology; Ramana Nanda is the Sarofim-Rock Professor of Business Administration at Harvard Business School; and Matthew Rhodes-Kropf is Visiting Associate Professor of Finance at the MIT Sloan School of Management. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here), and Agency Costs of Venture Capitalist Control in Startups by Jesse Fried and Mira Ganor.

The introduction of cloud computing services in the mid 2000s was a fundamental technological shift that has also had an impact on the financing landscape for Internet and web-based startups. A key benefit of cloud computing for such startups is the ability to “rent” hardware space in small increments and scale up as demand grows, instead of making large upfront investments when the outcome of the venture is still uncertain. Entrepreneurs and investors can therefore learn about the viability of startups with substantially less funding, lowering the cost of financing initial “experiments” that can help investors learn about the potential of new ventures before committing further capital.


Governance of the 25 Largest European Banks a Decade After the Crisis

Lisa Andersson is Head of Research of Aktis and Stilpon Nestor is Managing Director and Senior Advisor at Nestor Advisors. This post is based on their recent Nestor Advisors/Aktis publication.

This summer marked the 10-year anniversary of the start of the global financial crisis. Over the 18 months following August 2007, several bank collapses in the United States, Germany and Britain, culminating with the demise of Lehman Brothers in September 2008 shook the financial system to its core. The interconnectivity of the world’s financial system meant that the repercussions would be felt globally, and on a monumental scale. The US Department of the Treasury has estimated that total household wealth would lose some $19.2 trillion following a publicly-funded government bailout program. Over the last decade governments, regulators, banks and their investors have revamped the financial system and its supervision in order to recover the public subsidy and prevent a similar crash from happening again.


Standing Up for the Retail Investor

George David Banks is Executive Director of Main Street Investors Coalition and Professor Bernard Sharfman is Chairman of the Advisory Council.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst; Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and In Search of Absentee Shareholders by Kobi Kastiel and Yaron Nili (discussed on the Forum here).

A new shareholder advocacy group has been formed, the Main Street Investors Coalition. The Coalition aims to mitigate the adverse effects created by the concentration of shareholder voting power that now resides in the hands of mutual fund advisors. This concentration has developed because of the growing popularity of index mutual funds and the industry practice of delegating shareholder voting rights to their advisors.

Shareholder voting, when it is done with the intent of maximizing the wealth of all shareholders, is an important component of efficient corporate governance. According to the Delaware Supreme Court, “[w]hat legitimizes the stockholder vote as a decision-making mechanism is the premise that stockholders with economic ownership are expressing their collective view as to whether a particular course of action serves the corporate goal of stockholder wealth maximization.”


Five Key Points from the Financial Regulation Relief Law

Dan Ryan is Banking and Capital Markets Leader and Julien Courbe is Asset and Wealth Management Advisory Leader at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mr. Courbe, Mike Alix, Adam Gilbert, and Roberto Rodriguez.

[May 24], the President signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, the first major financial services legislation since Dodd-Frank. The act received crucial bipartisan support in the Senate and passed the House on May 22nd to triumphant cheers from the banking industry.

It is not a major overhaul of Dodd-Frank, nor is it strictly a community bank law, as headlines alternatively suggest. In reality, it makes several meaningful technical changes—most notably by raising the threshold at which a bank is considered a systemically important financial institution (SIFI) from $50 billion to $250 billion—while keeping the main pillars of post-crisis regulation intact. Mid-size banks will be the biggest winners as they will now be able to make plans for growth, including acquisitions, without considering the added compliance costs that come with breaching the systemically important threshold. Smaller community and rural banks also will see plenty of benefits from this law, including relief from the Volcker rule and a number of mortgage and lending requirements.


The Enforceability of Employment Arbitration Agreements

Robert Atkins and Liza Velazquez are partners and Maria Keane is counsel at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss publication by Mr. Atkins, Ms. Velazquez, Ms. Keane, David Brown, Jay Cohen and Daniel Toal. [1]

On May 21, 2018, the United States Supreme Court, in a long-awaited decision, held that employment arbitration agreements with class action waivers requiring individual arbitration are enforceable under the Federal Arbitration Act (the “FAA”), notwithstanding Section 7 of the National Labor Relations Act (the “NLRA”), which protects employees’ rights to engage in concerted activities. In so ruling, the Court’s 5-4 decision, issued in Epic Systems Corp. v. Lewis, which had been consolidated with two other cases, Ernst & Young, LLP v. Morris and NLRB v. Murphy Oil USA, Inc., resolved the different approaches federal courts had taken on this issue for years. Although the majority opinion acknowledged that the efficacy of class action waivers in arbitration agreements is, “[a]s a matter of policy[,]” debatable, it ruled that “as a matter of law the answer is clear”—federal courts must enforce arbitration agreements in accordance with their terms, including those that require individualized arbitration.


Shareholder Battles at Telecom Italia

Federica Soro is an analyst at Glass, Lewis & Co. This post is based on her Glass Lewis publication.

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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Against All Odds: Hedge Fund Activism in Controlled Companies by Kobi Kastiel.

The spotlight has been on Telecom Italia since Vivendi, the French media conglomerate controlled by Vincent Bolloré, built up a 24% stake in 2016. In the past few months, the glare has intensified over a series of shareholder meetings, court decisions and backroom negotiations, with governance and control of the Italian company—as well as influence over a strategic asset of national importance—in the balance.

One year ago, Vivendi managed to secure a majority of Telecom’s board for a three-year term, as its slate of nominees narrowly defeated the slate of independent directors proposed by institutional investors. Among rumors of clashes with the new oversight team, CEO Flavio Cattaneo became the second chief executive to leave Telecom in just over a year—receiving €25 million upon termination of his employment contract.


Weekly Roundup: June 1-June 7, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 1-June 7, 2018.

Global Governance: Board Independence Standards and Practices

Caremark and Reputational Risk Through #MeToo Glasses

How To Avoid Bungling Off-Cycle Engagements with Stockholders

Anticipating and Planning for Geopolitical & Regulatory Changes

Post-Dell Appraisal—Still Work to be Done

Proposed Amendments to the Volcker Rule

Statement at Open Meeting on Inter-Agency Proposal for Amendments to the Volcker Rule

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement, available here. 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.

[June 5, 2018], the Commission will consider proposed amendments to rules adopted under section 13 of the Bank Holding Company Act. The proposed amendments principally relate to prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds, commonly known as the “Volcker Rule.”

Before I turn to that, however, I want to acknowledge that yesterday the Commission approved a set of important actions. In three related releases, the Commission provided a new, optional “notice and access” method for delivering fund shareholder reports. We also invited investors and others to share their views on improving fund disclosure, and sought feedback on the fees that intermediaries charge for delivering fund reports. These releases, together, are important steps in our ongoing efforts to improve the experience of investors in mutual funds, ETFs and other investment funds by modernizing the design, delivery and content of fund disclosures to investors. Additional information about these releases, including a press release, fact sheet and statement, are available on


Statement on Proposed Revisions to Prohibitions and Restrictions on Propriety Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Stein’s recent public statement, 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.

I also would like to thank the staff for all of their hard work on this proposal. I’d like to begin my statement this morning [June 5, 2018] with a quote about today’s proposed amendment to the Volker Rule:

[W]e recognize that the proposed amendment could increase moral hazard risks related to proprietary trading by allowing dealers to take positions that are economically equivalent to positions they could have taken in the absence of the 2013 final rule. [1]

More on this later. Let’s start first with a little history.

October 19, 1987: Black Monday

On October 19, 1987, or Black Monday, the stock market plunged over 20% in one day—the largest single day drop in market history. [2] Black Monday’s drop was partially caused by rapid-fire trading related to a newly popularized financial product—portfolio insurance. Portfolio insurance, or so-called “dynamic hedging,” was sold as a mechanism for mutual funds, insurance companies, pension funds, and others to protect their market gains from future declines. [3] This hedging strategy compounded selling into a declining market and accelerated the pace of the crash. [4]


Proposed Amendments to the Volcker Rule

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 public statement, 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.

Thank you, Chairman Clayton, and thank you to the exceptional Staff in the Divisions of Trading and Markets and Investment Management for their work on these proposals. I’m especially appreciative to Andrew Bernstein in the Division of Trading and Markets and Brian Johnson in the Division of Investment Management for the time each of you spent with me and my staff throughout this process.

The Commission today [June 5, 2018] joins several other agencies in rolling back protections designed to keep banks from speculating with taxpayer money—more commonly known as the Volcker Rule. For the reasons Commissioner Stein has so thoughtfully explained, weakening these protections gives banks more leeway to do the kind of risky trading for which we should be ever more watchful. There are many questions raised by today’s proposal, and I commend Commissioner Stein’s statement to my colleagues. I’d also like to highlight three reasons why I cannot join the majority in voting to propose this rule.


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