Monthly Archives: January 2019

Mutual Fund Voting on Corporate Political Disclosure

Dan Carroll is Director of Programs and Bruce Freed is President of the Center for Political Accountability. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here) and The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here).

Support among the largest mutual funds for the Center for Political Accountability’s political disclosure resolution reached 53 percent in the 2018 proxy season, the highest level ever. Despite the eight-percentage point jump over 2017, the Big 3 institutional investors—Vanguard, BlackRock and Fidelity—continued to oppose shareholder requests that companies adopt transparency and accountability for their political spending with corporate funds.

CPA’s analysis, based on the Morningstar® Fund Votes Database and released last month, found that of the 46 largest asset managers, 12 supported 100 percent of the political spending resolutions and 11 supported none. 25 of the 46 groups increased their support from 2017 to 2018, while nine decreased support.


Why Are Firms with More Managerial Ownership Worth Less?

Rüdiger Fahlenbrach is Associate Professor at the Swiss Finance Institute at Ecole Polytechnique Fédérale de Lausanne (EPFL), Switzerland. This post is based on a recent paper by Professor Fahlenbrach; Kornelia Fabisik, Swiss Finance Institute doctoral student at EPFL; René M. Stulz, Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University; and Jérôme P. Taillard, Associate Professor of Finance at Babson College.

In our paper Why Are Firms With More Managerial Ownership Worth Less?, we provide new evidence on the relationship between firm value and managerial ownership.

An important and well-documented result in corporate finance is that firm value is positively correlated with managerial ownership over some range of ownership and then, beyond that range, becomes negatively correlated. Several theory papers model the tension between managerial ownership and incentives and predict such a concave relation: It is good when managers have some skin in the game, but if they own too many shares, they become entrenched.


Comments on the SEC Roundtable on Proxy Access

John C. Wilcox is Chairman of Morrow Sodali. This post is based on a Morrow Sodali comment letter submitted to the SEC by Mr. Wilcox.

I am writing on behalf of Morrow Sodali. We are a global consultancy and service provider with expertise in corporate governance, proxy solicitation and a range of related services. We occupy a position at the center of the relationship between the companies that are our clients and the shareholders who invest in them. In addition to our global client base and our network of offices around the world, our firm’s distinguishing characteristics are our understanding of shareholders, our practical ability to reach them and our commitment to helping companies engage productively with their owners.

We agree that the U.S. proxy system is overdue for reform. The array of issues highlighted during the roundtable revealed some of the system’s serious defects and limitations. These failings undermine public confidence in the governance of listed companies and compromise the integrity of the capital markets generally.


Supreme Court Review for Deal-Related Shareholder Litigation

George T. Conway, III is of counsel and David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

In an important development that may ultimately provide relief from some frivolous deal-related shareholder litigation in federal courts, the Supreme Court agreed to decide a case that could bring an end to private actions under Section 14(e) of the Securities Exchange Act of 1934, the general anti-fraud provision that governs tender offers. Emulex Corp. v. Varjabedian, No. 18–459 (U.S.).

As we explained in a memo last April, the case arose from the acquisition of a public company, Emulex, by a tender offer. The plaintiffs sued to enjoin the deal and for damages. After the district court denied a preliminary injunction and dismissed the complaint, the Ninth Circuit reversed the dismissal. And in doing so, the court of appeals created a square circuit conflict—it held that only negligence was required to state a Section 14(e) claim, in contrast to six other circuits, which require scienter, an actual intent to defraud.


Climate Change and Proxy Voting in the U.S. and Europe

Maximilian Horster is Managing Director at ISS-ESG and Kosmas Papadopoulos is Managing Editor at ISS Analytics. This post is based on their ISS-ESG memorandum. 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).


  • Investor awareness of environmental and social shareholder is growing on both sides on the Atlantic.
  • European companies generally surpass U.S. firms on climate change disclosures.
  • Climate change increasingly comes to a vote in the U.S. via the shareholder proposal process, and investors increasingly expressing support at the ballot.
  • Shareholder resolution filings are relatively scarce in Europe, where high ownership requirements make it difficult to file proposals in most markets (especially for individual investors).
  • Cultural differences may also explain the fewer proposals filed in Europe, as institutional investors often prefer engagement to instigate change

As the world came together in Katowice, Poland for the annual U.N. climate conference last week, institutional investors were also present, as they reiterated their climate commitments through at least three side conferences geared towards financial market participants. Host country Poland’s own stance on climate change is similar to how torn the investment world is on the issue: Poland is one of Europe’s most fossil fuel-dependent economies, with 80 percent of energy produced by burning coal. However, Poland is the first European country ever to issue a Green Bond—even before climate change poster child France, which has implemented reporting requirements and organized climate summits for investors endorsed by President Macron. Institutional investors are in the same situation: While many have launched ground-breaking new investment strategies and commitments to tackle climate change, these initiatives are often small in comparison to their core assets and are merely a modest first step vis-à-vis the challenges and risks that climate change poses.


Blockholder Heterogeneity, Multiple Blocks, and the Dance Between Blockholders

Charles J. Hadlock is the Frederick S. Addy Distinguished Chair in Finance at Michigan State University and Miriam Schwartz-Ziv is Assistant Professor of Finance at Michigan State University. This post is based on a recent article authored by Professor Hadlock and Professor Schwartz-Ziv, forthcoming in the Review of Financial Studies.

In our recent article titled Blockholder Heterogeneity, Multiple Blocks, and the Dance between Blockholders, forthcoming in the Review of Financial Studies, we consider issues related to blockholder heterogeneity and coexistence. We collect data on the blockholders of approximately 3,000 companies during the 2001–2014 period. We document substantial heterogeneity in holding periods, position sizes, and positions taken across blockholder types. In addition, we find that nonfinancial blocks are more likely to be observed in smaller, riskier, younger, and less liquid firms; these patterns are either not evident, or are reversed, for financial blocks.

Quite uniquely, we analyze the dynamics among multiple blocks that coexist in the same firm. We show that large and non-financial blocks crowd out other blocks, a behavior that appears causal. Small financial blocks often coexist in the same firm, but this outcome appears to be driven by correlated investment styles.


Boardrooms Without Female Representation

Lyla Qureshi is Senior Research Analyst at Equilar, Inc. This post is based on an Equilar memorandum by Ms. Qureshi.

Board diversity is a governance issue that has been getting a large amount of attention for the past couple of years. This year, gender diversity, particularly in relation to board member appointments, has been in the limelight. This heightened focus comes in part thanks to SB-826, a recently-passed California bill that will mandate that public companies headquartered in the state must place at least one woman on their board by the end of 2019. Furthermore, the legislation directs publicly listed companies to have two women on boards with five members, and three on those which have six or more members by 2021. To find out where the current Russell 3000, not just California, stands in terms of board gender diversity, Equilar conducted a study to examine which companies have not had a woman on their board.


NACD Public Company Governance Survey

Friso van der Oord is Director of Research and Barton Edgerton is a Research Consultant at the National Association of Corporate Directors (NACD). This post is based on their NACD memorandum.

About Our Survey

The 2018–2019 NACD Public Company Governance Survey presents findings from our annual questionnaire. This report details responses from more than 500 public-company directors. Findings from our private company governance survey are published separately. The first section of this publication presents key findings from our analysis of the data. The second section is a chart-based data appendix containing descriptive statistics and frequencies for all questions in the survey with aggregate responses to questions covering the most critical board leadership and governance topics. Results come from the more than 80 survey questions. Analysis derived from the Russell 3000 was provided by Main Data Group.


Oral Argument on Scheme Liability

Martin J. CrispDouglas Hallward-Driemeier, and David Hennes are partners at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Crisp, Mr. Hallward-Driemeier, Mr. Hennes, R. Daniel O’ConnorGregg WeinerEva Carman, and Christian Reigstad.

On December 3, 2018, the U.S. Supreme Court heard oral argument in Lorenzo v. SEC, which involves an attempt by the SEC to use a “scheme liability” theory under Section 10(b) of the Exchange Act against an individual who did not “make” the misstatements at issue under Janus v. First Derivative Traders, 564 U.S. 135 (2011). The Court’s decision in Lorenzo will address the ability of the SEC and private plaintiffs to bring Section 10(b) claims against those who transmit false and misleading statements that were made by another.


SEC Rule 10(b) implements Section 10(b) of the Securities Exchange Act of 1934, and contains three subsections prohibiting fraudulent conduct in connection with the purchase or sale of securities. Rule 10b-5(a) prohibits employing “any device, scheme, or artifice to defraud”; Rule 10b-5(b) prohibits making any “untrue statement of a material fact”; and Rule 10b-5(c) prohibits engaging in “any act, practice, or course of business which operates . . . as a fraud or deceit upon any person . . . .” Claims asserted under Rule 10b-5(b) address “misstatement liability,” while claims asserted under Rules 10b-5(a) and (c) address “scheme liability.”


SEC Enforcement Action for Non-GAAP Financial Measures

David A. Katz and Wayne Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz and Mr. Carlin.

The SEC recently instituted a settled cease-and-desist proceeding against an issuer found to have violated SEC requirements relating to the disclosure of non-GAAP financial information in two earnings releases, with the issuer paying a $100,000 civil money penalty.

Item 10(e)(1)(i)(A) of Regulation S-K requires that an issuer including non-GAAP financial measures in SEC filings present, with equal or greater prominence, the most directly comparable financial measures calculated and presented in accordance with GAAP. The SEC found that the issuer failed to satisfy this “prominence” requirement in two of its earnings releases:


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