Monthly Archives: December 2018

Bebchuk-Hirst Study of Index Funds Wins IRRC Institute Prize

Itai Fiegenbaum is a co-Editor of the Forum and Fellow at the Harvard Law School Program on Corporate Governance.

The IRRC Institute has announced that its 2018 annual investor research prize will be awarded to a study by Lucian Bebchuk and Scott Hirst, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy. Upon announcing the study winning the $10,000 prize, the IRRC Institute’s Executive Director Jon Lukomnik described the study as making “a substantial contribution to understanding big picture, weighty issues for investors and the global economy.”

According to the IRRC’s press release announcing the prize, the study “provides an analytical framework for understanding the incentives of index fund managers,” “provides the first comprehensive and detailed empirical account of the full range of stewardship activities that index fund managers do and do not undertake,” and “considers the significant policy implications of the  issues analyzed.”

The judges on the panel selecting the winning study were:

  • Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
  • James Hawley, Professor emeritus and former Director of the Elfenworks Center for Fiduciary Capitalism at St. Mary’s College of California
  • Erika Karp, Founder, CEO and Chair of the Board of Cornerstone Capital
  • Nell Minow, Governance Expert and Huffington Post Columnist

Biographies of the judges are available here.

More information about the IRRC Institute award is available here. The Bebchuk & Hirst study for which the prize was awarded is available here, and is discussed on the Forum here.

Manager Sentiment and Stock Returns

Xiumin Martin is Professor of Accounting at the Washington University in St. Louis Olin Business School. This post is based on a recent article, forthcoming in the Journal of Financial Economics, by Professor Martin; Fuwei Jiang, Associate Professor of Finance at the Central University of Finance and Economics; Joshua Lee, Assistant Professor at the University of Georgia J.M. Tull School of Accounting; and Guofu Zhou, Frederick Bierman and James E. Spears Professor of Finance at the Washington University in St. Louis Olin Business School.

In this study, we investigate the asset pricing implications of manager sentiment, focusing on its predictability for future U.S. stock market returns. Intuitively, investors may simply follow managers’ sentiment in financial disclosures, even though this sentiment may not represent fully the underlying fundamentals of the firm. Hence, high manager sentiment may lead to speculative market overvaluations. When the true economic fundamentals are revealed to the market gradually, the misvaluation diminishes and stock prices reverse, yielding low future stock returns (Baker and Wurgler, 2007). However, it is an open empirical question whether such hypothesized effects are significant in the stock market.


Corporate Governance Case Study: Tesla, Twitter, and the Good Weed

Justin Slane, Sharon Makower and Joe Green are editors for the Capital Markets & Corporate Governance Service at Thomson Reuters Practical Law. This post is based on a Practical Law article by Mr. Slane, Ms. Makower and Mr. Green.

Perhaps no company in the world has the perception of its brand being tied to one person more than Tesla Inc. (Tesla) and its CEO and now former chairman of the board, Elon Musk. As at least one journalist phrased it, “Elon Musk is Tesla. Tesla is Elon Musk.” And Musk is not just the face of Tesla, but a co-founder of PayPal and Solar City, the founder and current CEO of SpaceX and founder of its subsidiary, The Boring Company. He has crafted a “real-life Iron Man” persona, including all the eccentricity, and is undoubtedly one of the most recognizable and polarizing CEOs in the world.

But 2018 has not been the best year for Elon Musk. In what Musk would call negative propaganda pushed by short sellers, Tesla has faced heightened scrutiny and increasingly negative media attention related to a litany of issues, including cash burn, vehicle safety, production capabilities, and a string of employment-related lawsuits and executive exits (only made worse recently). Analysts and investors began to publicly cool on Tesla and question its long-term value, which Musk also attributed to short sellers.


CEO Transitions: Mitigating Risks and Accelerating Value Creation

Rusty O’Kelley is Global Leader of the Board Advisory & Effectiveness Practice at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley.

CEO transitions have always been challenging, but never more so than in today’s environment. As a board governance, leadership consulting and search firm, Russell Reynolds Associates is asked regularly to conduct CEO searches and support long-term CEO succession planning. We advise our clients not to forget about transition planning as a distinct process that needs attention and planning. We use succession planning and transition planning to describe different phases of a leadership transfer. Succession planning is first and includes the steps related to defining the success criteria, as well as the critical work related to identifying, assessing and developing potential CEO candidates. Transition planning encompasses the decision on which candidate to select (while it may not yet be formally announced) and the steps related to role transfer from the outgoing to the incoming CEO.


SEC Rulemaking Over the Past Year, the Road Ahead and Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks

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.

Thank you Jason [Healey] for that kind introduction. [1]

For many, December is a time to reflect on the past year and to look forward to what the New Year may bring. I believe organizations also should mark milestones, take stock of what has been done and what needs to be done, and adjust course accordingly.

My colleagues at the Commission and I go through this exercise relatively frequently, including to fulfill statutory reporting requirements—yes, like the public companies we regulate, we too have disclosure obligations.

In the past few months, we published a new, four year strategic plan and our annual report for fiscal year 2018. [2] We also participate in the annual report process for the Financial Stability Board and the Financial Stability Oversight Council. [3] In addition, our divisions and offices undertake similar reviews and, in some cases—notably, the Division of Enforcement and the Office of Compliance Inspections and Examinations—publish an annual report and exam priorities, respectively. [4]

Today [December 6, 2018], I would like to go through this exercise with respect to our rulemaking efforts. I will review our progress on the agenda for 2018, then discuss the agenda for 2019, and close with observations on certain of the key risks that we are monitoring—namely, Brexit, the LIBOR transition and cybersecurity risks.


Opening Remarks at the Municipal Securities Conference

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at the inaugural Municipal Securities Conference, 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.

Good morning and welcome. I am delighted to help kick off the inaugural Municipal Securities Conference, although I regret that because of other meetings and commitments, I am doing so from our New York office. Before going any further, I want to make it clear that my remarks are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.

I would like to thank Rebecca Olsen and the staff in our Office of Municipal Securities (“OMS”) for organizing and hosting the conference. The theme of today’s agenda—disclosure in an evolving market—is particularly appropriate. I am pleased to see the broad participation and diversity of perspectives here today, including panelists representing the views of investors, issuers, [1] broker-dealers, municipal advisors, and the MSRB, among others.


Weekly Roundup: November 30-December 6, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 30–December 6, 2018.

Online Digital Token Platforms as National Securities Exchanges

Spotlight on Boards

2018 Year-End Issues for Audit Committees

Virtual Currencies as Commodities?

State of Integrated and Sustainability Reporting 2018

Default Activism in the Debt Market

Why Common Ownership Is Not an Antitrust Problem

Universal Proxies: What Companies Need to Know

13F Analysis: Q3 2018

Dinosaur Governance in the Era of Unicorns

Acquirer Reference Prices and Acquisition Performance

Principles for a Responsible Civilian Firearms Industry

Principles for a Responsible Civilian Firearms Industry

The Principles for a Responsible Civilian Firearms Industry were conceived and written by Christopher J. Ailman, Chief Investment Officer CalSTRS; Christianna Wood, Fellow at Harvard’s Advanced Leadership Initiative; Michael McCauley, Senior Officer at the Florida State Board of Administration; Peter Reali, Senior Director at Nuveen; John O’Hara, Managing Director and Senior Advisor at Rockefeller Asset Management; and Rakhi Kumar, Senior Managing Director, Head of ESG Investments and Asset Stewardship at State Street Global Advisors. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

As investors, we have come together to develop a framework to advance a responsible civilian firearms industry in the United States of America. We believe in the rule of law and respect the 2nd Amendment of the U.S. Constitution. As asset owners and asset managers, we have a duty to our beneficiaries who depend on us for financial security; such obligations compel us to assume responsibility for reducing risks that we and our beneficiaries face if and when we hold a financial interest in both private and public firearms related enterprises. We believe that enterprises involved in the manufacturing, distribution, sale and enforcement of regulations of the firearms industry are well positioned to support pragmatic transparency and safety measures that contribute to the responsible use of firearms. Through this framework, we assert our role as investors in encouraging such practices, and we identify expectations for the firearms industry that will reduce risks and improve the safety of civil society at large. Further, we commit to monitoring progress by companies over time and engaging with them regularly on this issue, especially in support of enterprises that champion adoption of responsible practices.


Acquirer Reference Prices and Acquisition Performance

David A. Whidbee is Professor and Omer L. Carey Chair in Financial Education at Washington State University; Qingzhong Ma is Assistant Professor at California State University, Chico; and Wei Zhang is Assistant Professor at California State University, Chico. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

How do investors adjust their estimates of a stock’s value in response to an acquisition announcement? Rationally, the acquirer’s new stock price should reflect the synergistic gains associated with the merger, the premium paid to target company shareholders, the method of payment, and other value-relevant information associated with the acquisition. But what if the acquirer’s stock value is already difficult to estimate or there is limited information available about the target company? Is it possible that investors rely on heuristics under these circumstances? Specifically, we are interested in whether investors are influenced by readily available salient reference prices, even if those reference prices are fundamentally irrelevant.


Dinosaur Governance in the Era of Unicorns

Alissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico. 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) by Lucian Bebchuk and Kobi Kastiel.

The list of global unicorns—private companies exceeding a billion-dollar valuation—is dominated by two flags: Chinese and American. This bi-polar nature of the world of corporate giants is not a reflection of the importance of the two largest global economies but the effectiveness of the ecosystems that have produced them. Japan, the third largest economy is home to exactly one unicorn and Germany, the fourth largest economy, is home to less unicorns than India, the fifteenth economy in the world.

In 2013, when the term “unicorn” was coined, only 39 companies have trailblazed the billion-dollar mark. Since then, the growth of unicorns—numbering closer to 300 and valued at almost $900 trillion dollars—has been both utopian and Kafkaesque, considering the slowdown of the global economy. All signs point to the fact that technology unicorns, alongside state-owned companies, will dominate rankings of the largest global corporations.


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