Monthly Archives: January 2019

Arbitration with Uninformed Consumers

Mark Egan is an assistant professor at Harvard Business School; Gregor Matvos is a professor at the University of Texas at Austin McCombs School of Business; and Amit Seru is the Steven and Roberta Denning Professor of Finance at the Stanford Graduate School of Business. This post is based on their recent paper.

Arbitration is a private mechanism for resolving disputes outside of the court system. In arbitration the contracting parties present their case to a private arbitrator who then issues a legally-binding resolution to the dispute. When consumers purchase a product or service, the purchase often contains a pre-dispute arbitration provision, which legally mandates that the consumer must resolve any related dispute using arbitration. Moreover, the provision prohibits the consumer from suing the seller in court. Such arbitration clauses have become increasingly common in the U.S. and are currently used by all brokerage firms, the largest insurance companies (e.g., AIG, Aetna, Inc., etc.), the largest financial firms (e.g., American Express, Chase Bank, etc) and are also pervasive among non-financial “new economy” firms (i.e. Amazon, Verizon, Uber, etc.). Despite the prevalence of arbitration clauses in resolving consumer disputes spanning trillions of dollars of economic activity, there is little empirical analysis of the arbitration. Arbitration is also a hot button policy issue; in 2017 the Consumer Financial Protection Bureau unveiled a controversial consumer arbitration rule, which was later overturned by the U.S. Congress. In our paper Arbitration with Uniformed Consumers we examine consumer arbitration in the securities industry using a new detailed data covering 9,000 arbitration disputes between consumers and their financial advisers.


Program Hiring Post-Graduate Academic Fellows

The Harvard Law School Program on Corporate Governance invites applications for Post-Graduate Academic Fellows in the areas of corporate governance and law & finance. Qualified candidates who are interested in working with the Program as Post-Graduate Academic Fellows may apply at any time and the start date is flexible.

Candidates should be interested in spending two to three years at Harvard Law School (longer periods may be possible). Candidates should have a J.D., LL.M., or S.J.D. from a U.S. law school, or a Ph.D. in economics, finance, or related areas by the time they commence their fellowship. Candidates still pursuing an S.J.D. or Ph.D. are eligible so long as they will have completed their program’s coursework requirements by the time they start. During the term of their appointment, Post-Graduate Academic Fellows work on research and corporate governance activities of the Program, depending on their skills, interests, and Program needs. Fellows may also work on their own research and publishing in preparation for a career in academia or policy research. Former Fellows of the Program now teach in leading law schools in the U.S. and abroad.

Interested candidates should submit a CV, transcripts, writing sample, list of references, and cover letter to the coordinator of the Program, Ms. Jordan Figueroa, at [email protected] The cover letter should describe the candidate’s experience, reasons for seeking the position, career plans, and the kinds of projects and activities in which he or she would like to be involved at the Program. The position includes Harvard University benefits and a competitive fellowship salary.

Finalized ISS FAQ Updates on Compensation Policies and Equity Compensation Plans

Michael Albano is partner, Julia M. Rozenblit is a practice development lawyer, and Emily C. Barry is a law clerk at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. 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).

ISS recently released updates to its Frequently Asked Questions (“FAQs”) on U.S. Compensation Policies and Equity Compensation Plans. [1] The FAQs are intended to provide general guidance regarding the way in which ISS will analyze certain issues as it prepares proxy analyses and determines vote recommendations for U.S. public companies.

A summary of updates to the FAQs is provided below. In addition to the ISS and Glass Lewis proxy voting guidelines that were released in the fall of 2018, U.S. public companies should consider the applicability of the ISS FAQs in light of their individual facts and circumstances. [2]


Financial Reporting in 2019: What Management and the Audit Committee Need to Know (and Ask)

Cathy Dixon, Ellen Odoner and P.J. Himelfarb are partners at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum.

Top officials and staff from the SEC, the PCAOB and the FASB gathered in mid-December in Washington, D.C. at the 2018 AICPA Conference on Current SEC and PCAOB Developments to provide year-end accounting, auditing and disclosure guidance to corporate management, audit committees and outside auditors. In this post, we focus on key takeaways for management, as preparers, and the audit committee, as overseers, of the 2018 annual report on Form 10-K and ongoing financial reporting in 2019. Specifically, we discuss the regulators’ expectations for enhanced disclosure and related controls in the following areas:

  • Escalating risks around cybersecurity, Brexit and the transition away from LIBOR
  • “New GAAP” and the end of SAB 118 provisional income tax accounting
  • Non-GAAP financial measures, which remain on the SEC’s radar screen
  • Identification and disclosure of material weaknesses in internal control over financial reporting (ICFR)


Q3 2018 Gender Diversity Index

Amit Batish is Content Manager at Equilar Inc. This post is based on an Equilar memorandum by Mr. Batish, with data analysis contributed by Courtney Yu, Lyla Qureshi, and Hailey Robbers.

For the fourth consecutive quarter—an entire year—the Equilar Gender Diversity Index (GDI) increased. The percentage of women on Russell 3000 boards increased from 17.7% to 18.0% in Q3 2018. This acceleration moved the needle, pushing the GDI to 0.36, where 1.0 represents parity among men and women on corporate boards.


Legitimate Yet Manipulative: The Conundrum of Open-Market Manipulation

Gina-Gail S. Fletcher is Associate Professor of Law at Indiana University Maurer School of Law. This post is based on her recent article, published in Duke Law Journal.

On November 30, 2018, the Commodity Futures Trading Commission (“CFTC”) lost its bid to hold Don Wilson and DRW Investments, LLC (collectively, “DRW”) liable for open-market manipulation. In so doing, the court rejected the CFTC’s intent-based theory of liability without additional proof of price artificiality or market inefficiency resulting from the defendant’s conduct. The court’s scathing opinion is yet another blow to the Commissions’ efforts to hold traders liable for open-market manipulation based on their inherently flawed, intent-centric theory of liability. And, it is further evidence that the CFTC’s intent-centric theory of liability for open-market manipulation is incomplete because it divorces liability for open-market manipulation from market harm.

Open-market manipulation presents knotty practical and theoretical questions for courts, lawmakers, and regulators because it does not involve misstatements, fraud, fictitious trades, or deceit. Rather, the transactions are facially legitimate, involve no bad acts, and are executed on the open-market. In the absence of traditional markers of manipulation, the CFTC & SEC (collectively, the Commissions) have adopted the position that bona fide, open-market trades are manipulative if the trader has a manipulative intent at the time of the transaction. However, this theory of liability fails in a key regard—it does not articulate how allegedly manipulative open-market transactions harm the market. Indeed, this was a key critique underlying the court’s dismissal of the suit against DRW.


Dealing with Activist Hedge Funds and Other Activist Investors

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 publication by Mr. Lipton, Steven A. RosenblumKaressa L. Cain, and Sabastian V. Niles. 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 Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Regardless of industry, size or performance, no company should consider itself immune from hedge fund activism. No company is too large, too popular, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have come under fire. Activists set new records in 2018, targeting the largest number of companies (nearly 300), deploying more capital and winning a greater number of board seats (161) than ever before.

Campaigns by the most well-known activist hedge funds are surging, and there are more than 100 hedge funds currently engaged in activism. Activist hedge funds have significantly more than $100 billion of assets under management, and remain an “asset class” that attracts investment from major traditional institutional investors.


Should Corporations Step Into the Governmental Vacuum?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

In this year’s annual letter to CEOs, BlackRock CEO Laurence Fink once again advocates the importance of a long-term approach, at the same time mourning the prevalence of political dysfunction and acknowledging the resulting increase in public anger and frustration: “some of the world’s leading democracies have descended into wrenching political dysfunction, which has exacerbated, rather than quelled, this public frustration. Trust in multilateralism and official institutions is crumbling.” For a moment, I thought he was going to veer off into “American carnage,” but instead his focus is on the responsibility of corporations to step into the breach: “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others.”


Weekly Roundup: January 18-24, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 18–24, 2019.

Incorporating Social Activism

Public Hedge Funds

Rule 14a-8 Shareholder Proposals and the Government Shutdown

10 Tips for 10-Ks and Proxy Statement

OCIE Examination Priorities for 2019

Another Look at “Super Options”

Directors: Older and Wiser, or Too Old to Govern?

The Expansion of Regulation A

Market Power and Inequality

Global Antitakeover and Antiactivist Devices

Global Antitakeover and Antiactivist Devices

Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and a Research Fellow at the Harvard Law School Program on Corporate Governance. Adi Libson is an assistant professor in the Bar-Ilan University Law Faculty. This post is based on their recent article, published in the Yale Journal on Regulation. Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk; and The Elusive Quest For Global Governance Standards, by Lucian Bebchuk and Assaf Hamdani.

Corporate activity is becoming ever more global. The increase in global activity is reflected both in the growing number of cross-border M&A transactions (which have reached over $1 trillion in the first half of 2018) and the pervasive phenomenon of cross-listing, through which companies raise equity from various financial markets located in different jurisdictions. In our recent article, published in the Yale Journal on Regulation, we explore the impact of this global corporate activity on the insulation of public companies from takeovers and activist interventions. We label this impact of corporate global activity “Global Antitakeover Devices” (GADs).


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