Monthly Archives: April 2019

Comment Letter on Earnings Releases and Quarterly Reports

Jeff Mahoney is General Counsel of the Council of Institutional Investors. This post is based on a comment letter from CII to the U.S. Securities and Exchange Commission.

I am writing in response to the Securities and Exchange Commission’s (SEC or Commission) request for comment on earnings releases and quarterly reports (RFC).

The Council of Institutional Investors (CII) is a nonprofit, nonpartisan association of public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their
families. Our associate members include a range of asset managers with more than $35 trillion in assets under management.

Quarterly Reports

CII believes that investors, companies, and other market participants benefit from the current reporting frequency model, which requires from domestic issuers filing quarterly reports on Form 10–Q. In our view, the requirement to report historical earnings on a quarterly basis is a key element of the timely and accurate information flow that underpins the quality and efficiency of our capital markets. The requirement helps ensure that important information is promptly and transparently provided to the marketplace allowing investors to assess concrete progress against strategic goals.


Merger Agreement Termination based on Plain Contract Language

Paul J. ShimDavid I. Gelfand, and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

[On March 14, 2019], the Delaware Court of Chancery found that a target company in an agreed merger properly terminated the merger agreement following the passage of the specified “end date” where the buyer failed to exercise its right under the agreement to extend the end date. See Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019). The decision is a stark reminder that courts will enforce the terms of a merger agreement as written, and that the failure to comply with seemingly ministerial formalities can have severe consequences.


Vintage Capital Management, LLC and its affiliates (collectively, “Vintage”) entered into a merger agreement to acquire Rent-a-Center, Inc. (“Rent-a-Center”). As is customary, the merger agreement provided that if the merger were not consummated on or before a prescribed “end date,” either party would have the unilateral right to terminate the merger agreement. The parties agreed that the end date would occur six months from the signing date.


Review and Analysis of 2018 U.S. Shareholder Activism

Melissa Sawyer is a partner and Lauren S. Boehmke and Nathaniel R. Ludewig are associates at Sullivan & Cromwell LLP. This post is based on their Sullivan & Cromwell memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (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).

On the surface, the 2018 activism data is largely consistent with 2017, but with an uptick in overall activity. The amount of capital invested in new activist positions in 2018 was up approximately $2.5 billion from 2017, and activists won more board seats in 2018 than in 2017, mostly through settlements. Although several well-known activists (including Third Point, Pershing Square and Greenlight Capital) announced disappointing investment results in 2018, and the industry experienced negative net asset flows overall, activist funds continue to attract substantial new capital.

While Elliott was the most active fund globally in 2018, accounting for 9% of all campaigns, many other established activists were busy: nine of the top ten activist funds (calculated by aggregate market value of their activist positions at year-end 2018) each invested more than $1 billion in new campaigns in 2018. 52% of all board seats won globally since 2013 have been won by a group of 11 activists (in order of board seats won): Starboard, Elliott, Icahn, JANA, Engaged Capital, Sarissa Capital, ValueAct, Corvex, FrontFour, Glenview and Legion Partners. Many of these “name brand” activists have since spun-off new funds, or their key players have moved on to other funds, leading to a dispersion of skills and techniques across a wide playing field and resulting in 2018 producing a record number of first-time activists initiating campaigns.


Russell 3000 Boards On Pace to Achieve Gender Parity by 2034

Amit Batish is Content Manager at Equilar Inc. This post is based on an Equilar memorandum by Mr. Batish, with data analysis contributed by Louisa Lan, Hailey Robbers, Lyla Qureshi, Matt Zellmer, Elizabeth Vellutini.

The Equilar Gender Diversity Index (GDI) has now increased for a fifth straight quarter. The percentage of women on Russell 3000 boards increased from 18.0% to 18.5% in Q4 2018. This acceleration once again moved the needle, pushing the GDI to 0.37, where 1.0 represents parity among men and women on corporate boards across the Russell 3000.

The State of California recently passed a piece of legislation—SB 826—that will require public companies headquartered in California to have a minimum of one female on its board of directors by December 31, 2019. That minimum will be raised to at least two female board members for companies with five directors or at least three female board members for companies with six or more directors by December 31, 2021. Violators of this legislation will be subject to financial consequences.


Weekly Roundup: March 29-April 4, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 29-April 4, 2019.

Director Onboarding and the Foundations of Respect

Independent Directors: New Class of 2018

Negative Activism

Proxy Preview 2019

The SEC and Self-Reporting of Financial Conflicts of Interest

FCPA and the Commodity Exchange Act: A New Relationship

The Politics of CEOs

Driving Diversity and Inclusion—the Role for Chairs and CEOs

The Perils of Lyft’s Dual-Class Structure

The Shareholder Rights Directive II

Firms’ Rationales for CEO Duality: Evidence from a Mandatory Disclosure Regulation

Governance and Performance in Emerging Markets

Governance and Performance in Emerging Markets

Davit Karapetyan is Regional Corporate Governance Lead for Latin America and the Caribbean at the International Finance Corporation (IFC); and Alexandre Di Miceli Da Silveira is professor at Alvares Penteado School of Business in Sao Paulo and partner at Direzione Management Consulting. This post is based on their IFC report.

Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani; Learning and the Disappearing Association between Governance and Returns by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here); and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Investors, including IFC and other development finance institutions, increasingly look at governance as an indicator of firm quality and a factor in investment selection. There is a strong business case for linking sound corporate governance practices to better firm performance. This proposition is based on the view that companies adopting governance best practices make better business decisions over time, better manage their risks, enjoy enhanced market reputation, and have improved access to capital. From a macro perspective, CG may also contribute to country-level social and economic development.

“Sound corporate governance helps businesses attract investment on better terms. Clients are more accountable to investors and responsive to stakeholder concerns. They also operate more efficiently and are able to better manage risks.”
—IFC website

Over the past two decades, numerous academic studies worldwide have investigated whether the link between CG quality and firm performance is supported by empirical data. Most research finds a positive relationship between following recommended CG practices and financial performance indicators, especially when using market value ratios such as Tobin’s Q, price-to-book value (P/ BV), and price-to-earnings (P/E). (See below.)


Firms’ Rationales for CEO Duality: Evidence from a Mandatory Disclosure Regulation

Marc Goergen is Professor of Finance at IE Business School; Peter Limbach is Assistant Professor at the University of Cologne; and Meik Scholz-Daneshgari is a postdoctoral researcher at Karlsruhe Institute of Technology. This post is based on their recent paper.

The common practice of combining the roles of the CEO and chairman of the board (CEO duality) has been the topic of one of the longest debates in corporate governance. On the one side, a majority of S&P 500 firms combine the two roles. On the other side, investors and governance experts—via shareholder proposals and public campaigns—frequently pressure firms into separating the two roles, emphasizing a lack of effective managerial oversight under CEO duality. Nevertheless, most such proposals do not receive majority support, which suggests disagreement among shareholders about the value of CEO duality. Such disagreement is consistent with the inconclusive academic literature on the relation between CEO duality and firm performance (for a review, see Krause, Semadeni, and Cannella, 2014), as well as the lack of reliability of extant studies likely suffering from the non-random choice of board structures. The above discussion highlights the need for both practitioners and scholars to better understand why firms combine or separate the CEO and chairman roles.

Against this background, our paper entitled Firms’ Rationales for CEO Duality: Evidence from a Mandatory Disclosure Regulation exploits a 2009 amendment to Regulation S-K, which requires public firms to disclose the reasons for combining or separating the roles of CEO and chairman. We provide unique evidence on the first-time disclosure by S&P 500 companies of the reasons behind their board leadership structure. Thereby, we propose a novel approach to understanding why firms have opted for or against CEO duality. Examining the stock market reaction to firms’ disclosures, we also assess the value implications and informativeness of the stated reasons.


The Shareholder Rights Directive II

Hans-Christoph Hirt is head of EOS and Andy Jones is EOS sector lead of mining at Hermes Investment Management. This post is based on their Hermes memorandum.

The Hermes Shareholder Rights Directive survey was conducted to gauge levels of awareness and readiness for the amendment to the 2007 Shareholder Rights Directive coming into force in 2019. Research was conducted by Citigate Dewe Rogerson among its panel of European institutional investors, including asset owners and asset managers, during December 2018. A total of 175 responses were collected from the UK, the Netherlands, Germany, Italy, Spain and the Nordics.

The Directive

With the aim of enhancing the stability and sustainability of EU companies, in May 2017, the European Parliament and Council agreed an amendment to the 2007 Shareholder Rights Directive (the Directive). The objectives of the Directive are to enhance transparency in the investment chain and to hold investors accountable for the integration of Environmental, Social and Governance (ESG) factors in investment decisions, the level and quality of long-term shareholder engagement and the alignment of investors’ investment strategy and remuneration structures with the medium-to-long term performance of their clients’ assets. All asset owners and asset managers operating in Europe will be required to comply with the national laws implementing the amended Directive.


The Perils of Lyft’s Dual-Class Structure

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and a Research Fellow at the Harvard Law School Program on Corporate Governance. This post is the second in which they analyze the terms of dual-class IPOs by major companies, following their earlier post on The Perils of Dell’s Low-Voting Stock (discussed on the Forum here).

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), both by Lucian Bebchuk and Kobi Kastiel, and the keynote presentation on The Lifecycle Theory of Dual-Class Structures.

Lyft, Inc. (“Lyft”) went public on March 29, 2019, with a dual-class structure in a well-subscribed IPO valuating it at over $23 billion. This post focuses on the governance costs and risks that Lyft’s public investors should expect to face down the road.

Our analysis builds on our earlier research work on multiclass structures, including The Untenable Case for Perpetual Dual-Class Stock (Virginia Law Review 2017) and The Perils of Small-Minority Controllers (Georgetown Law Journal 2019). Below we identify and analyze in turn two significant problems:

  • Tiny-minority controllers: Lyft’s IPO structure enables its co-founders to have a practically absolute lock on control (about 49% of the voting power) while holding only a very small stake (less than 5%) of the company’s equity capital; and
  • Extremely long-lasting lock on control: Lyft’s co-founders will be able to retain control for an extremely long period, which could well last for five or six decades, even if they become value-decreasing leaders.

Each of these governance risks can be expected to both (i) decrease the expected per share future value of Lyft by increasing agency costs and distortions, and (ii) increase the discount to a per-share value of Lyft at which low-voting shares of Lyft will trade. Each of these effects would operate over time to reduce the market price at which the low-voting shares of public investors would trade. These effects should thus be taken into account by any public investors that consider holding Lyft shares.

Tiny-Minority Shareholders in Control

Post-IPO, Lyft is a publicly traded dual-class company in which public investors hold low-voting shares entitling them to one vote per share. Lyft’s co-founders, Logan Green and John Zimmer, hold high-voting shares entitling them to twenty votes per share. In the case of Lyft, the design of its governance structure gives rise to what we define as tiny-minority controllers (see the typology we introduced in The Perils of Small-Minority Controllers).


Driving Diversity and Inclusion—the Role for Chairs and CEOs

David Mills leads Commercial Strategy and Sector Operations, Rachel Middleton is a member of the Diversity and Inclusion Practice and the CEO & Board Practice knowledge team, and Harsonal Sachar leads Knowledge for the Diversity and Inclusion Practice, all at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum.

The case for diversity in corporate leadership has never been stronger. To learn more, Russell Reynolds Associates spoke to nearly 60 directors and senior executives at large global companies across 10 countries who have helped foster change in their organizations. They consistently emphasized the critical role that the chair and CEO play in driving diversity and inclusion (D&I) in the workplace, specifically in terms of creating inclusive environments where everyone can thrive. From their insights, we have distilled three sets of takeaways, detailing how chairs and CEOs can drive progress on the agenda.

1. Change Starts with the Chair

As board leaders, chairs can model an ideal culture within the boardroom by:

  • Ensuring that the board itself is diverse, including women, minorities and diverse points of view; engaging in creative efforts to build the board candidate pipeline; and eliminating bias from the ideal director profile.
  • Creating an inclusive boardroom environment that fully harnesses the benefits of a diverse board and encouraging all board members to contribute and constructively challenge assumptions and perspectives.
  • Setting the tone that D&I is important to the organization by keeping it on the board agenda, asking the right questions and monitoring the relevant data. Chairs and boards can and do have a direct impact on the success of D&I within the organizations they serve.


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