Daily Archives: Monday, February 11, 2019

It’s Time to Adopt the New Paradigm

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Monday, February 11, 2019
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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. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, Amanda S. Blackett, and Kathleen C. Iannone.

Capitalism is at an inflection point. For the past 50 years, corporate law and policy has been misguided by Nobel Laureate Milton Friedman’s ex-cathedra doctrinal announcement that the sole purpose of business is to maximize profits for shareholders. Corporations have also been faced with technological disruption, globalization and the rise of China, capital markets dominated by short-term trading and focused on quarterly profits, and unrelenting attacks and threats by activist hedge funds. In response to these pressures, corporations focused primarily on increasing shareholder wealth in the short-term, at the expense of employees, customers, suppliers, long-term value and the local and national communities in which they operate. The prioritization of the wealth of shareholders at the expense of employee wages and retirement benefits, with a concomitant loss of the Horatio Alger dream, gave rise to the deepening inequality and populism that today threaten capitalism from both the left and the right.

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Towards Accountable Capitalism: Remaking Corporate Law Through Stakeholder Governance

Posted by Lenore Palladino and Kristina Karlsson, Roosevelt Institute, on
Monday, February 11, 2019
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Lenore Palladino is Senior Economist and Policy Counsel and Kristina Karlsson is a Program Associate at the Roosevelt Institute. This post is based on their Roosevelt Institute 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).

Corporations today operate according to a model of corporate governance known as “shareholder primacy.” This theory claims that the purpose of a corporation is to generate returns for shareholders, and that decision-making should be focused on a singular goal: maximizing shareholder value. This single-minded focus—which often comes at the expense of investments in workers, innovation, and long-term growth—has contributed to today’s high-profit, low wage economy.

Many business leaders, policymakers, and average Americans accept this doctrine of corporate governance as “natural” law—the unshakeable reality of business. However, shareholder-focused corporations are not natural market creations, and the idea of “maximizing shareholder value” is relatively recent. This misguided focus, driven by the neoliberal conception of shareholders as the only actor within the firm who is critical to corporate success, is the result of decades of flawed theory in corporate law and policy. Increasing economic evidence suggests that shareholder primacy is not benefiting other corporate stakeholders, including workers, suppliers, consumers, or communities.

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As Luck Would Have It: Executive Compensation at Energy Companies

Posted by Lucas W. Davis (University of California) and Catherine Hausman (University of Michigan), on
Monday, February 11, 2019
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Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley; and Catherine H. Hausman is an Assistant Professor at the Gerald R. Ford School of Public Policy at the University of Michigan. This post is based on a VoxEU column and is related to their recent paper. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

Fortunes are made and lost every year as oil prices rise and fall, impacting the macroeconomy, the stock market, investment, and of course the value of oil and gas firms (Hamilton, 2009; Kilian and Park 2009; Baumeister and Kilian, 2016). What happens to the fortunes of the leaders of those oil and gas firms? In this post, we argue that the compensation of U.S. oil and gas executives is closely tied to oil prices—much more closely than economic theory would predict. Theory says that executives should be rewarded for the value they bring to a firm, and that they should be incentivized to take the best actions on behalf of the firm. With billions of dollars at stake each year, we argue that boards and shareholders may want to revisit how compensation is structured at these firms.

Executive compensation frequently comes under scrutiny, with shareholders as well as the general public asking questions such as whether executives are over-compensated (e.g., Costello 2011). This scrutiny at times zeroes in on oil and gas firms (Fowler and Lublin, 2013)—most recently related to questions about conflicts of interest at boards of directors (Casselman, 2009), other corporate governance concerns (Denning, 2018), and even climate change (Kent, 2018).

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Saying So Long to State Court Securities Litigation

Posted by Laurie Smilan and Nicki Locker, Wilson Sonsini Goodrich & Rosati, on
Monday, February 11, 2019
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Laurie Smilan is of counsel and Nicki Locker is partner at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum.

When Congress enacted the Securities Exchange Act of 1934, providing for federal regulation of securities traded on the public markets, it took the opportunity to consider conforming amendments to the sister statute regulating initial public offerings it had enacted the year before, the Securities Act of 1933. One such amendment would have done away with the ’33 Act’s concurrent jurisdiction and removal bar provisions, instead providing for exclusive federal jurisdiction like the new ’34 Act did. An ABA Special Committee had advocated for the change, which was included in the original Senate bill, out of concern that concurrent jurisdiction “will inevitably result in varied interpretations of the Act.” The Special Committee warned that “in view of the [‘33 Act’s] heavy liabilities,” “the resulting uncertainty” of “varied [and inconsistent] interpretations” by state and federal courts “will almost certainly operate as a detriment to legitimate business.” Unfortunately, the amendments were not adopted and the prophecy has proved prescient.

As senior SEC officials, the Treasury Department, and stock exchange leaders have recognized, the threat of protracted and often frivolous securities class action litigation has contributed to a decades-long decline in IPOs. Rather than risk becoming the target of vexatious securities litigation, companies increasingly choose private capital transactions or strategic combinations in lieu of going public, a phenomenon that has had significant detrimental effects on both the economy in general and small investors in particular. Congress attempted to stem the tide when it adopted the Private Securities Litigation Reform Act (“PSLRA”) in 1995. However, since that time, the number of public companies has been halved and the number of IPOs has declined from 949 in 1996 to an average of less than 150 per year.

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