Monthly Archives: February 2019

Common Ownership in America: 1980-2017

Matthew Backus is Assistant Professor at Columbia Business School; Christopher Conlon is Assistant Professor at the New York University Stern School of Business; and Michael Sinkinson is Assistant Professor at the Yale School of Management. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

The classic profit-maximizing model of the publicly-traded firm has underpinned every aspect of economics for a century, from antitrust and regulation to theories of taxes and trade. According to this model, a public firm’s shareholders hire the management to maximize the firm’s profits, and thereby maximize the value of those shares. Trends emerging in the past few decades, including the rise of indexing among investors have led some to question whether the classic model is still applicable. Unsurprisingly, this has led to a forceful debate, centered on the implications of common ownership, and the reliability of the research purporting to show its effects. Our new working paper, Common Ownership in America: 1980–2017 provides a new analytical framework for this debate, by comprehensively analyzing the theoretical and empirical implications of the common ownership hypothesis among all S&P 500 firms from 1980–2017. Our paper identifies why common ownership presents such a tremendous challenge to markets and regulators if prevailing hypotheses are true, but we also identify important data problems, misconceptions and erroneous assumptions that call into question the reliability of existing research. Our goal in doing so is to pave the way for more rigorous research and discussion on this important question.

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D.C. Speaks Up: A Push for Board Diversity from the SEC and Congress

Howard Dicker and Ade Heyliger are partners and Aabha Sharma is an associate at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum.

On February 6, 2019, the SEC Staff issued a new interpretation relating to director qualifications and diversity which could impact proxy statement disclosures for the upcoming proxy season, and potentially D&O questionnaires as well. On the same day, companion bills were introduced into both the U.S. House of Representatives and Senate that would require every public company to disclose in proxy statements: (i) data regarding the racial, ethnic and gender composition of its board of directors, director nominees, and executive officers, as well as the status of any such person as a veteran, in each case, based on voluntary self-identification; and (ii) whether the board has a policy or strategy to promote racial, ethnic and gender diversity among directors, nominees or executive officers. The SEC’s interpretation and the Congressional “Corporate Diversity Bill” are the latest evidence that efforts over the past two years for enhanced board diversity are gaining considerable momentum. [1]

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Corporate Governance in Emerging Markets

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS paper by Kosmas Papadopoulos, Managing Editor and Executive Director with ISS Analytics, the data intelligence arm of Institutional Shareholder Services. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

Analyzing corporate governance at companies in emerging markets can be really tough. A combination of differing regulatory standards, disclosure requirements, market norms, local investor preferences, and more all collude to make the evaluation of governance structures difficult. Giving credit where due, emerging market economies have made significant corporate governance strides over the past decade, as the adoptions and revisions of governance codes and relevant regulations have led to better disclosure standards, higher levels of board independence, and more shareholder protections.

Despite these developments, emerging markets continue to have a unique set of characteristics which require special attention when assessing corporate governance at the country level and at the company level. At the country level, the legal framework, the strength of institutions, and the rule of law all affect the quality of governance of individual firms. And at the company level, ownership structures will often determine the types of governance challenges a company may face, as concentrated ownership may lead to potential risks of management entrenchment or the risk of expropriation of minority shareholders.

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CEO Pay Mix Changes Following Say on Pay Failures

Ran Bi is a Research Analyst at Equilar Inc. This post is based on her Equilar memorandum. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here) and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

In response to the 2008 financial crisis, U.S. legislation was passed in the form of the Dodd-Frank Act to bring some changes in the corporate environment. Say on Pay, which gives shareholders the right to vote on the remuneration of executives, addressed the issue of excessive CEO pay and was meant to give shareholders a voice and reduce CEO pay to a reasonable level.

Say on Pay has been in effect for almost eight years, but the question of how long it takes for Say on Pay votes to exert a noticeable impact on CEO pay is difficult to address. Intuitively, it seems possible that CEO pay should decrease since it is under the scrutiny of a large number of shareholders. However, the data reveals a different story. CEO pay, instead of declining, actually experienced a small degree of growth after Say on Pay was put into law.

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The Division of Corporation Finance’s Response to Mandatory Arbitration Proposal

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

The issue of mandatory arbitration bylaws is a hot potato—and a partisan one at that (with Rs tending to favor and Ds tending to oppose). And in this no-action letter issued yesterday to Johnson & Johnson—granting relief to the company if it relied on Rule 14a-8(i)(2) (violation of law) to exclude a shareholder proposal requesting adoption of mandatory arbitration bylaws—Corp Fin successfully passed the potato off to the State of New Jersey. Crisis averted. However, the issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position:

The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention. As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration,

consideration that would be more appropriate at the Commissioner level than at the staff level. However, as Clayton has previously indicated, mandatory arbitration is not an issue that he is anxious to have the SEC wade into at this time. To be sure, if the parties really want a binding answer on the merits, he suggested, they might be well advised to seek a judicial determination.

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A Capitalist’s Solution to the Problem of Excessive Buybacks

Nell Minow is Vice Chair of ValueEdge Advisors. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here).

We may not need a government solution to the issue of excessive corporate stock buybacks. We most certainly do not need the solution proposed by Senators Chuck Schumer and Bernie Sanders, requiring companies to adopt minimum wage requirements for hourly workers before buying back stock. What we need is a capitalist solution, removing misaligned incentives, moral hazards, and diversion of assets to make sure the market’s buyback decision is the right one.

The conventional thinking about stock buybacks is that when corporate managers and directors believe the stock is undervalued and do not have a better use for excess capital they should return it to shareholders. No one can argue with that; it is vastly preferable to the usual alternative, overpaying for acquisitions that are not core to the company’s business. That’s a whole different discussion of misaligned incentives.

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Go-Shops Revisited

Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School and Annie Zhao is a Fellow in the Program for Research on Markets and Organizations at Harvard Business School. This post is based on their recent paper.

Until approximately 2005, the traditional sale process for U.S. public companies involved a broad market canvass and a merger agreement with the winning bidder, followed by a “no shop” obligation for the seller between the signing and the closing of the merger. In the mid-2000s, however, the introduction of the “go-shop” technology turned this standard deal template on its head. In its purest form, a go-shop process involves an exclusive (or nearly exclusive) negotiation with a single buyer, followed by an extensive post-signing “go shop” process to see if a higher bidder could be found.

The first go-shop transaction appeared in Welsh, Carson, Anderson & Stowe’s buyout of U.S. Oncology in March 2004. Go-shops proliferated quickly after that, particularly in private equity (PE) buyouts of public companies. Many commentators at the time were skeptical of go-shops. The conventional wisdom held that go-shops amounted to nothing more than a fig leaf to provide cover for management to seal the deal with its preferred bidder, while insulating the board against claims that it failed to satisfy its obligation to maximize value for the shareholders in the sale of the company.

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Weekly Roundup: February 15-21, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of February 15-21, 2019.

Books and Records Access for Terminated Directors


Board Diversity by U.S. Region


Practical Lessons in Boardroom Leadership



Corporate Bankruptcy and Restructuring 2018-2019


Text Messages and Personal Emails in Corporate Litigation



Institutional Investors as Short Sellers?




Bank Boards: What Has Changed Since the Financial Crisis?


Investor Engagement and Activist Shareholder Strategies


The Ashland-Cruiser Proxy Contest—A Case Study




REIT M&A: Use and Overuse of Special Committees



The Creation and Evolution of Entrepreneurial Public Markets

The Creation and Evolution of Entrepreneurial Public Markets

Shai Bernstein is Assistant Professor of Finance at Stanford Graduate School of Business; Abhishek Dev is a Researcher at Harvard Business School; and Josh Lerner is Jacob H. Schiff Professor of Investment Banking at Harvard Business School. This post is based on their recent paper.

One important channel through which financial development enables economic growth is through the funding of innovative and entrepreneurial projects—activities that have been long recognized as particularly hard to finance with outside capital. Well-developed public equity markets have been shown to be instrumental in filling this financing gap, allowing young and fast-growing companies to fund R&D activities. Recognizing the importance of entrepreneurial finance, a major focus of financial policymakers around the world has been on the creation of new stock exchanges for young and small-capitalization companies, often characterized by less restrictive listing requirements. Such exchanges, termed second-tier exchanges, have been heralded in many places as a way to promote the creation, financing, and retention of job-creating new ventures. Anecdotally, while there have been some highly visible successes (such as NASDAQ in New York, London’s Alternative Investment Market, and the Shenzhen-based ChiNext market), there have been many more failures (such as EASDAQ).

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Social Responsibility and Enlightened Shareholder Primacy: Views from the Courtroom and Boardroom

Peter AtkinsMarc Gerber and Edward Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden 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).

There is an ongoing debate about the role that publicly traded for-profit business corporations should play in addressing a broad range of problems confronting our world today. Many issues fall under the ESG label—meaning they are environmental, social and/or governance-related in nature. Investors, as well as interest groups with varying agendas, have joined in this debate.

Although the motivations of ESG proponents may vary, many ESG proponents are investors and asset managers that believe appropriate company consideration of ESG matters, and the attendant board oversight, improve the long-term performance of the companies in which they are invested and reduce the risk in those investments.

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