Monthly Archives: August 2018

Dual-Class Index Exclusion

Posted by Andrew Winden (Stanford University) and Andrew Baker (Stanford University), on

Wednesday, August 22, 2018

Dual-class stock, Index funds, Institutional Investors, Private ordering, Shareholder voting
More from: Andrew Baker, Andrew Winden

Andrew Winden is a Fellow at the Rock Center for Corporate Governance at Stanford University and Andrew C. Baker is a Doctoral candidate in Accounting at the Stanford Graduate School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

One of the most contentious and long-standing debates in corporate governance is whether company founders and other insiders should be permitted to use multi-class stock structures with unequal votes to control their companies while seeking capital through a public listing. Institutional investors have lobbied Congress, state legislatures and the Securities Exchange Commission unsuccessfully for decades to prohibit such stock structures. Following competitive pressure from the American Stock Exchange and NASDAQ, the New York Stock Exchange changed its listing rules to permit such structures in 1984. In the increasingly competitive global environment for listings, other stock exchanges have also started permitting multi-class listings.

Corporate Governance in Emerging Markets

Posted by Ruth V. Aguilera (Northeastern University) and Ilir Haxhi (University of Amsterdam), on

Tuesday, August 21, 2018

Boards of Directors, Brazil, China, Emerging markets, India, International governance, Management, Ownership, Russia, Securities regulation
More from: Ilir Haxhi, Ruth Aguilera

Ruth V. Aguilera is Professor at the D’Amore-McKim School of Business at Northeastern University; and Ilir Haxhi is Assistant Professor of Strategy and Corporate Governance at the University of Amsterdam. This post is based on their recent article, forthcoming as a chapter in the Oxford Handbook on Management in Emerging Markets (Eds.) R. Grosse & K. Meyer, Oxford University Press.

Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

This essay belongs to an edited book dedicated to management in emerging markets. In our chapter, we adopt a systematic cross-national comparative approach to provide an overview of corporate governance (CG) in emerging markets (EMs). Our focus is mostly on the BRIC countries (Brazil, Russia, India, and China). We begin by highlighting the importance of better understanding CG in EMs, and identifying some of the key challenges these countries face as they seek to enhance their CG. Second, we review managerial research conducted after the year 2000 on CG in EMs in the following four categories: ownership, boards of directors, top management teams (TMTs), and CG practices and reform. We discuss the main research questions and findings from this collective body of work, which tends to be “siloed” in terms of drawing few cross-national comparisons. Third, we offer an overview of the main CG features of each of the BRIC countries relative to one another, taking on the OECD Guidelines of CG as its benchmark framework. To do so, we address core governance areas related to the overall model of CG, ownership types and ownership rights, information disclosure and reporting, and stakeholder management and corporate social responsibility. Finally, we conclude by highlighting common themes for CG in emerging markets and suggesting fruitful areas for future research.

Board Diversity Developments

Posted by Arthur H. Kohn, Elizabeth K. Bieber, and Maria I. Maldonado, Cleary Gottlieb Steen & Hamilton LLP, on

Tuesday, August 21, 2018

Board composition, Board turnover, Boards of Directors, Disclosure, Diversity, Engagement, Institutional Investors, Shareholder voting
More from: Arthur Kohn, Elizabeth Bieber, Maria Maldonado, Cleary Gottlieb

Arthur H. Kohn is partner and Elizabeth K. Bieber and Maria I. Maldonado are associates at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Kohn, Ms. Bieber, and Ms. Maldonado.

Over the last few years, boards have come under mounting pressure to focus on board composition and refreshment, including length of tenure, individual and aggregate skills mix and diversity. A few years ago, CalPERS’ revised its Global Governance Principles to call for companies to conduct rigorous evaluations of director independence after twelve years’ service, and ISS’ QualityScore metric rewards companies where the proportion of non-executive directors with fewer than six years tenure makes up more than one-third of the board, in addition to scrutinizing boards where average tenure exceeds 15 years. Companies also face demands to justify the contributions of individual directors and to conduct rigorous evaluations to ensure that the board functions effectively and with the right mix of skills. Correspondingly, refreshment is one of the top areas of continued governance focus from other investors and advocates. This update is intended to provide boards with data that brings them up to date on developments in this area, since it is certain to be an area of continuing focus for various constituencies in the near future.

Corporate Governance—The New Paradigm: A Better Way Than Federalization

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on

Monday, August 20, 2018

Accountable Capitalism Act, Federalism, Hedge funds, Institutional Investors, Long-Term value, Securities regulation, Shareholder activism, Short-termism, Stakeholders, US Senate
More from: Martin Lipton, Wachtell Lipton

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 memorandum by Mr. Lipton. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here) and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

While “The Accountable Capitalism Act” introduced last week by Senator Elizabeth Warren contains several very worthwhile provisions, it is premised on the federalization of all public corporations with revenues in excess of $1 billion. Mandatory federal incorporation and the creation of a federal office to make regulations and supervise compliance would be a major incursion into state corporation law. It is reminiscent of proposals by Ralph Nader some half-century ago to achieve control of major corporations by mandatory federal incorporation. Warren’s proposal should not receive any more support than Nader’s. However, like Nader’s proposal led to significant changes in environment regulation, Warren’s will likely lead to major changes to the relationship between corporations and the institutional investors and asset managers who control them.

Federal FinTech Bank Charters

Posted by Lee Meyerson, Keith Noreika, and Adam Cohen, Simpson Thacher & Bartlett LLP, on

Monday, August 20, 2018

Banks, Capital requirements, Charter & bylaws, Deposit insurance, Financial institutions, Financial regulation, Financial technology, Liquidity, OCC, Risk management, State law
More from: Adam Cohen, Keith Noreika, Lee Meyerson, Simpson Thacher

Lee Meyerson and Keith Noreika are partners and Adam Cohen is counsel at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Meyerson, Mr. Noreika, Mr. Cohen, and Spencer Sloan.

On July 31, the Office of the Comptroller of the Currency (OCC) announced that it will begin accepting applications for limited-purpose national bank charters formed to provide nondepository financial technology, or “fintech,” bank products and services. [1] The federal charter will largely allow fintech businesses to operate nationwide under a single set of national standards, without needing to seek state-by-state licenses or joining with brick-and-mortar banks. This announcement follows efforts by prior Comptrollers of the Currency to develop a fintech charter, [2] and coincides with the publication of a report by the U.S. Department of Treasury that encourages the OCC’s consideration of applications for fintech charters. [3]

Shareholder Vote on Golden Parachutes: Determinants and Consequences

Posted by Albert H. Choi (University of Virginia Law School), Andrew Lund (Villanova University), and Robert J. Schonlau (Miami University of Ohio), on

Monday, August 20, 2018

Change in control, Dodd-Frank Act, Executive Compensation, Golden parachutes, Management, Mergers & acquisitions, Proxy advisors, Say on pay, Securities regulation, Shareholder voting, Takeover defenses
More from: Albert Choi, Andrew Lund, Robert Schonlau

Albert H. Choi is Professor and Albert C. BeVier Research Professor of Law at University of Virginia Law School; Andrew Lund is Professor of Law at Villanova University Charles Widger School of Law; and Robert J. Schonlau is Associate Professor of Finance at Miami University of Ohio Farmer School of Business. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).

Since the 1980s, the federal government has repeatedly attempted to influence pay-setting for top managers at public companies. Most recently, Congress and the SEC have attempted to amplify the voice of public company shareholders on executive compensation by requiring advisory shareholder votes. These two interventions, known as “Say-on-Pay” and “Say-on-Golden-Parachute,” were promulgated under the Dodd-Frank Act and promised to focus and identify shareholder outrage over problematic pay practices. Say-on-Pay (“SOP”) asks shareholders to vote on the previous year’s executive pay practices in their entirety, while Say-on-Golden-Parachute (“SOGP”) asks shareholders to pass on merger-related severance payments that would become payable to executives when the change-in-control takes place.

Taking Stock: Share Buybacks and Shareholder Value

Posted by Ric Marshall, Panos Seretis, Agnes Grunfeld, MSCI Inc., on

Sunday, August 19, 2018

Capital allocation, Capital expenditures, Dividends, Equity-based compensation, ESG, Executive Compensation, Index funds, Institutional Investors, Long-Term value, R&D, Repurchases, Shareholder value, Short-termism
More from: Agnes Grunfeld, Panos Seretis, Ric Marshall, MSCI

Ric Marshall is Executive Director of ESG Research, Panos Seretis is Head of ESG Research, and Agnes Grunfeld is Vice-President at MSCI Inc. This post is based on a MSCI memorandum by Mr. Marshall, Mr. Seretis, and Mr. Grunfeld.

Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, by Jesse Fried (discussed on the Forum here); and Short-Termism and Capital Flows by Jesse Fried and Charles C.Y. Wang (discussed on the Forum here).

Executive Summary

Share buybacks have become the favored means for distributing cash to investors among large-cap S. companies, exceeding cash dividends every year since 1997 at 388 of the 610 companies (63.6%) we studied.
A majority of the companies we observed bought back shares when prices were high rather than low, as buybacks have replaced dividends as the dominant way of returning cash to investors at many companies.
Contrary to concerns expressed by many observers, we found no compelling evidence of a negative impact from share buybacks on long-term value creation for investors overall. In each of the areas we examined, beginning with MSCI ESG Ratings but also including CAPEX, R&D, new debt issues, and, most importantly, value creation, the companies that were most actively distributing cash to their investors were also the strongest companies.
Companies where index investors were the largest shareholders included a much wider range of buyback impacts, good and bad, than companies where the largest shareholders were buy-and-hold investors: total returns for the buy-and-hold investor companies were 18% higher, on average, than for the index investor companies from 2007 to 2016.

Microcap Board Governance

Posted by Annalisa Barrett, Board Governance Research LLC, and Jon Lukomnik, Investor Responsibility Center Institute, on

Saturday, August 18, 2018

Board composition, Board dynamics, Board tenure, Boards of Directors, Capital formation, Director compensation, Director qualifications, Executive Compensation, Management, Small firms
More from: Annalisa Barrett, Jon Lukomnik, Board Governance Research, IRRC Institute

Annalisa Barrett is a clinical professor of finance in the University of San Diego School of Business and the founder and CEO of Board Governance Research LLC; and Jon Lukomnik is Executive Director of the Investor Responsibility Center Institute (IRRCi). This post is based on an IRRCi publication authored by Professor Barrett.

As investors seek returns in non-traditional asset classes, some have turned to microcap public equity (defined here as companies with less than $300 million in market capitalization). Most of these companies are not included in major indices and many do not have analysts following them. Therefore, their governance practices have not received the same level of scrutiny as larger capitalization companies.

Despite microcap public companies’ importance in our capital markets, there is a paucity of studies examining their board composition and governance practices. This post provides insights into the current governance landscape in this asset class. Where available, comparisons are made to the boards of the companies included in the Russell 3000 Index.

Additionally, as calls increase for companies to have more diverse boards, a broader pool of director candidates must be considered. Larger capitalization companies’ boards often desire director candidates to have prior public company board experience in order to be considered for an open board seat. Directors serving on microcap company boards have boardroom experience, but may not have previously come to the attention of larger companies’ nominations and governance committees via traditional board searches. The complete publication provides an examination of the pool of these experienced directors from which larger company boards can draw.

Corporate Governance; Stakeholder Primacy; Federal Incorporation

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on

Friday, August 17, 2018

Accountability, Boards of Directors, Corporate Social Responsibility, Federalism, Political spending, Shareholder primacy, Stakeholders, State law, Takeovers, US Senate
More from: Martin Lipton, Wachtell Lipton

Related research from the Program on Corporate Governance on adding a federal incorporation option includes Federal Corporate Law: Lessons from History; and Vigorous Race or Leisurely Walk: Reconsidering the Competition Over Corporate Charters, both by Lucian Bebchuk and Assaf Hamdani.

Senator Elizabeth Warren has introduced legislation to make all corporations with $1,000,000,000 of annual revenue subject to Federal corporate governance (by requiring them to be chartered as a United States corporation). The Bill rejects shareholder primacy and embraces stakeholder governance; not less than 40% of the directors to be elected by the employees.

The Federal charter would provide that directors consider the interests of all corporate stakeholders—including employees, customers, suppliers, shareholders, and the communities in which the corporation operates. The Bill also has a director business judgment provision, promoting long-term investment and facilitating rejection of takeover bids, modeled on constituency statutes in some 30 states.

Weekly Roundup: August 10-16, 2018

Posted by Harvard Law School Forum on Corporate Governance & Financial Regulation, on

Friday, August 17, 2018

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of August 10-16, 2018.

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Monthly Archives: August 2018

Dual-Class Index Exclusion

Corporate Governance in Emerging Markets

Board Diversity Developments

Corporate Governance—The New Paradigm: A Better Way Than Federalization

Federal FinTech Bank Charters

Shareholder Vote on Golden Parachutes: Determinants and Consequences

Taking Stock: Share Buybacks and Shareholder Value

Executive Summary

Microcap Board Governance

Weekly Roundup: August 10-16, 2018

SEC Concept Release on Compensatory Offerings

Shedding the Status of Bank Holding Company

Circuit Split on Morrison Application

Proposed Amendments to SEC’s Whistleblower Program

Women in the C-Suite: The Next Frontier in Gender Diversity

Director Skill Sets

FCPA Successor Liability

Urban Vibrancy and Firm Value Creation

Self-Dealing Without a Controller

The Misplaced Focus of the ISS Policy on NOL Poison Pills

New Amendments to Delaware General Corporation Law

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