Monthly Archives: May 2019

Weekly Roundup: April 26–May 2, 2019

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This roundup contains a collection of the posts published on the Forum during the week of April 26–May 2, 2019.

2019 Compensation Committee Guide

The SEC’s Position on Digital Assets

Engaging With Your Investors

Complex Compliance Investigations

Recent Trends in Off-Shore Targeted US Class Actions

Short-Term Investors, Long-Term Investments, and Firm Value: Evidence from Russell 2000 Index Inclusions

Gender Diversity in Silicon Valley

The Compensation Committee Agenda for 2019

Accounting Class Actions Filings and Settlements—2018 Review and Analysis

Individual Autonomy in Corporate Law

Individual Autonomy in Corporate Law

Elisabeth de Fontenay is Associate Professor at Duke University School of Law. This post is based on her article, recently published in the Harvard Business Law Review.

What is a corporation? The field of corporate law is riven with competing visions of the corporate form. The task of defining the corporation is particularly challenging today, when the state has largely ceded to private parties the task of establishing rights and duties among the corporation and its various stakeholders. Under this “contractarian” approach, the primary function of corporate statutes and the common law of corporations is not regulation, but rather helping parties set their own terms for the corporate endeavor. As a result, today’s corporation is a protean vehicle, able to accommodate a wide range of activities and on a wide scale.

Given its many competing visions, it is perhaps easier to clarify what the corporation is by finding agreement over what the corporation is not. My recent article, Individual Autonomy in Corporate Law, seeks to do precisely that. It explores two relatively recent developments in corporate law that have generated considerable criticism from corporate law scholars. The first is the Supreme Court’s recognition of corporate religious rights in Burwell v. Hobby Lobby Stores, Inc. The second is the Nevada legislature’s decision to eliminate management’s mandatory fiduciary duties to the corporation. Despite their obvious differences, there is a common thread between them. Both can be interpreted at least in part as efforts to expand individual rights or autonomy of a particular corporate constituency—shareholders in the case of Hobby Lobby, and management in the case of Nevada corporate law. Both reflect the political or philosophical stance that, even within a vehicle designed to constrain individual behavior and voice ex ante, a particular space should be preserved for individual rights and autonomy ex post.


Accounting Class Actions Filings and Settlements—2018 Review and Analysis

Elaine Harwood is vice president, Frank Mascari is principal, and Laura Simmons is senior advisor at Cornerstone Research. This post is based on their Cornerstone report.

Executive Summary

Securities class action filings involving accounting allegations remained at uncharacteristically high levels as the trend of core filings against larger defendant firms continued. The total value of accounting class action settlements rebounded to the second-highest level in the last 10 years, with all five mega settlements involving an accounting allegation.

There were 143 securities class actions involving accounting allegations (accounting case filings) during 2018, nearly 86 percent more than the historical average.

  • Total accounting case filings far exceeded post-PSLRA (Private Securities Litigation Reform Act) levels for the second year in a row. The total was driven by the filing of 79 merger and acquisition (M&A) accounting case filings alleging failure to reconcile a non-GAAP measure to a GAAP measure.
  • Market capitalization losses for core accounting case filings rose to its highest level in the last 10 years as the trend of filings against larger defendant firms continued.
  • The number of accounting case settlements declined relative to 2017 and the prior five years but remained above the lows in 2011–2012.
  • The value of accounting case settlements more than quintupled compared to the prior year, comprising almost 90 percent of total settlement value in 2018.
  • The average settlement for accounting cases increased dramatically due to a handful of large settlements. In addition, the median settlement amount for accounting cases overall increased by almost 60 percent, indicating a broader shift in the typical case size.


What we do. How we do it. Why it matters: Vanguard’s Investment Stewardship Commentary

Glenn Booraem is Principal and an Investment Stewardship Officer at Vanguard. This post is based on Vanguard’s Investor Stewardship Commentary. 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).

  • As the industry’s only mutually owned investment company, Vanguard takes seriously its responsibility to represent the interests of the more than 20 million people who invest in Vanguard funds. As more investors have flocked to Vanguard and especially to the index funds pioneered by its founder, the late John C. Bogle, we have grown only more steadfast in our sense of responsibility for our clients and our safeguarding of their interests.
  • In this commentary, we look at the history of corporate governance, the vast improvements in it over the past few decades, and opportunities for further improving governance and investment stewardship.
  • We also seek to reframe the conversation about sustainable investing. When a Vanguard fund—particularly an index fund—invests in a company, we expect that the fund may hold shares of that company conceivably forever. The way a board governs a company—including its oversight of material environmental and social risks—should be aligned to create sustainable value long into the future.
  • Finally, we differentiate Vanguard’s role as a provider of both index and actively managed funds by exploring the different approaches that index and active managers may take to investment stewardship.


The Compensation Committee Agenda for 2019

Steve Van Putten is senior managing director; David Bixby is managing director; and Jannice L. Koors is senior managing director at Pearl Meyer & Partners, LLC. This post is based on a Pearl Meyer memorandum by Mr. Van Putten, Mr. Bixby, Ms. Koors, and Matt Turner. 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).

Pearl Meyer’s annual “Top Five” publication provides a roadmap for boards that are seeking to get ahead of emerging issues. More than ever, we are seeing the compensation committee’s scope of influence expand, while much attention is being paid to how directors themselves are compensated. Measuring and rewarding performance—both financial and non-financial—based on the specific goals of each company continues to be a complicated endeavor. Meanwhile, decisions must be made within a complex and uncertain business and geopolitical environment.

Our five topics for 2019 follow the convention of previous years in that we are offering a balance of practical, near-term ideas, as well as future-looking topics for your consideration.


The Perennial Quest for Board Independence: Artificial Intelligence to the Rescue?

Dr. Akshaya Kamalnath is Lecturer in Corporate Law at Deakin Law School. This post is based on her recent article, forthcoming in the Albany Law Review.

The question of the ideal composition of company boards is unlikely to have the perfect answer. While the need for independent directors was emphasized in the early nineties and continues to be emphasized even today, additional new ideas have crept in. The idea of board diversity and especially gender diversity has become popular in recent times. The rationale, at least in part, for most of these proposals is to ensure that the board is active, acts independently of management, and is able to consider various perspectives that might affect the company while making decisions. Could Artificial intelligence (AI) help solve some of these problems?

In a recent article I argue that AI can help enhance board independence by reducing agency costs. At first, AI can be used to help directors discharge their duties and as AI for boards becomes more reliable, corporate law will have to evolve to ensure that duties of officers are meant to ensure the safe and efficient use of AI. In proposing practical safeguards to the use of AI on boards, the article draws from processes followed in the context of cancer treatment where AI is currently being used.


Proposed Changes for the Federal Reserve’s Control Analysis

Mark Nuccio is partner and Gideon Blatt is an associate at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

On April 23, 2019, the Federal Reserve Board (the “Board”) released for public comment proposed changes to its longstanding positions on the exercise of controlling influence under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) [1] (the “Proposal”). [2] The Proposal holds promise for simplification of structures and promoting investment activity in the financial services, asset management and fintech sectors.

The Proposal revises the current approach for determining control and introduces a “Tiered Presumptions” framework that would consider the scope of various relationships at certain thresholds of voting rights (5%, 10% and 15%) to trigger a regulatory presumption of control. Specifically, the Proposal relates to indicia of control that may trigger a presumption of a controlling influence. [3]

While the Proposal is couched in terms of control of a banking organization, it will have farther-reaching effects because the Board uses the same controlling influence standards when analyzing non-banking controlling influence questions. Comments must be received by 60 days after the date of publication in the Federal Register. [4]


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