Monthly Archives: September 2019

The Effects of Shareholder Primacy, Publicness, and “Privateness” on Corporate Cultures

Donald C. Langevoort is the Thomas Aquinas Reynolds Professor of Law at Georgetown Law School. This post is based on his recent article, forthcoming in the Seattle University Law Review. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk; The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

There is widespread belief in both scholarship and business practice that internal corporate cultures strongly affect economic outcomes for firms, for better or worse. In turn, there is also a growing belief that corporate governance arrangements materially affect corporate cultures. If this is true, it suggests an intriguing three-link causal chain: governance choices influence corporate performance, at least in part via their effects on internal culture. This should be important to lawyers and legal scholars because of the symbiotic nature of law and governance: the increasing risk of enhanced corporate criminal and civil liability when cultures are judged to be deficient. Finding the right place for culture in governance is a heavy lift, and the subject of my recent essay for the “Berle XI” symposium.

By many accounts today (though hardly without controversy), the dominant norm in American corporate governance is shareholder primacy—managers are expected as a result of the combined forces of law, culture and economic incentives to act intently for the wealth-maximizing benefit of their shareholders. The theoretical justification for this truncated autonomy is that managers are naturally self-interested, requiring monitoring of various sorts in the name of (if not by) its shareholders in order to minimize opportunism in the exercise of power. To enthusiasts for this principal-agent model of governance, this embrace of the shareholder primacy norm in the last three or four decades has paid off in greater productivity, innovation and capital formation. Many in financial economics and corporate law thus now take it as a normative given, arguing only about whether we need to empower and protect shareholders a bit more, less, or have it about right to achieve optimal shareholder wealth over the desired time frame and unit of measurement.


Use of Special Committees in Conflict Transactions

Andrew R. Brownstein, Benjamin M. Roth. and Elina Tetelbaum are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton article, recently published in the M&A Journal, by Mr. Brownstein, Mr. Roth, Ms. Tetelbaum, Ryan A. McLeod, and Carmen X. W. Lu.

Special committees often play a critical role in conflict transactions, such as transactions involving controlling stockholders, corporate insiders or affiliated entities, including “going private” transactions, or purchases or sales of assets or securities from or to a related party. Such “conflict transactions” raise complicated legal issues and, in today’s environment, a high likelihood of litigation. A well-functioning and well-advised committee can offer important protections to directors and managers in after-the-fact litigation.

But special committees are not one-size-fits-all, and they can be deployed to the detriment of a company and its stockholders. Forming a special committee in the absence of a conflict transaction can needlessly hamper the operations of the company and its ability to transact, create rifts within the board and between the board and management, create a misimpression of conflict that invites rather than discourages litigation, and burden the company with an inefficient decision-making structure that may be difficult to unwind. It is important, therefore, for companies to carefully consider—when the specter of a real or potential conflict arises—whether a special committee is in fact the best approach, whether it is advisable at all, and whether recusal of conflicted directors or other safeguards is perhaps the better approach. Equally important is the proper formation and empowerment of the special committee and the execution of its work.


Investor Stewardship Reporting and Engagement

Hywel Ball is Managing Partner for Assurance, UK and Ireland; Loree Gourley is Director of Regulatory and Public Policy; and Brandon Perlberg is Associate Director of Regulatory and Public Policy, all at EY UK. This post is based on an EY UK memorandum by Mr. Ball, Ms. Gourley, Mr. Perlberg, Christabel Cowling, and Peter Flynn. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here), and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Vital to rebuilding trust in business is an effective accountability framework based on good stewardship, governance and reporting. Within this, transparency over stewardship of investments plays a fundamental role in providing confidence to a broad range of stakeholders. Pursuing greater transparency drives greater accountability, and promotes a critical shift from short-term thinking to creating long-term value.

What is this review about?

This is first-of-its kind research designed to enable a better understanding of how UK-based asset managers and asset owners are currently reporting on and engaging with their investee companies on stewardship. We analysed recent stewardship reporting by the 30 largest UK investors who are signatories to the UK Stewardship Code (20 asset managers and 10 asset owners). We then assigned scores based on the depth of their reported stewardship activity across different areas of investor priority. The findings provide a comprehensive picture of investor priorities and expectations, and offer unique insights about the journey toward more transparent reporting that promotes the safe investment of capital for the long-term.


Reg FD Enforcement Action

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

Reg FD prohibits selective disclosure of material, nonpublic information by public companies (or by its senior officials or specified other employees) to securities market professionals and shareholders reasonably likely to trade on the information. If a public company does make a disclosure of that kind, the company is required under Reg FD to disclose the information to the public. Information is considered “material” if there is “a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or if the information would significantly alter the total mix of available information.” And that’s where the thorny part comes in. The test for materiality is a subjective one, based on the facts and circumstances. But judgments about materiality of disclosures are often complicated and muddy and frequently made in real time.

No Action Process—Letter from Five Investor Organizations to SEC Division of Corporate Finance

This post is based on a joint letter to the U.S. Securities and Exchange Commission from Kenneth A. Bertsch, Executive Director at the Council of Institutional Investors; Lisa Woll, CEO at US SIF; Josh Zinner, CEO at the Interfaith Center on Corporate Responsibility; Mindy S. Lubber, CEO and President at Ceres; and Sanford Lewis, Director at the Shareholder Rights Group.

Via Hand Delivery

September 19, 2019

Mr. William Hinman
Director, Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549

RE: Investor Concerns and Recommendations Regarding the Division’s No-Action Process Announcement of September 6, 2019

Dear Director Hinman,

We are writing on behalf of our members to express major concerns regarding the September 6, 2019 “Announcement” of the Division of Corporation Finance regarding Rule 14a-8 no-action requests. Under this newly announced policy, the range of anticipated options for Rule 14a-8 no-action responses will be expanded to include instances where the Staff “declines to state a view” or responds “orally.” We request the Division rescind this change in process, as it reduces transparency and accountability, increases the burden on investors, and could increase conflict between companies and their investors.


Trading and Arbitrage in Cryptocurrency Markets

Igor Makarov is Associate Professor of Finance at the London School of Economics and Political Science and Antoinette Schoar is the Michael M. Koerner Professor of Entrepreneurship at the MIT Sloan School of Management. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

Cryptocurrencies such as bitcoin or ethereum have rocketed to public attention over the past few years. These are digital currencies built on blockchain technology that allows verification of payments and other transactions in the absence of a centralized custodian. While significant attention has been paid to the dramatic ups and downs in the volume and price of cryptocurrencies, there has not been a systematic analysis of the trading and efficiency of cryptocurrencies markets. Cryptocurrencies are traded on many nonintegrated exchanges that are independently owned and exist in parallel across countries. But in contrast to traditional, regulated equity markets, the cryptocurrency markets lack any provisions to ensure that investors receive the best price when executing trades. As a result, it is centrally important to understand how arbitrageurs trade across different markets; and if there are any constraints to the flow of arbitrage capital which can result in market segmentation. In our article Trading and Arbitrage in Cryptocurrency Markets (forthcoming in the Journal of Financial Economics), we attempt to fill this gap using trade level data for 34 exchanges across 19 countries.


Statement on Volcker Rule Amendments

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent public statement, available here. The views expressed in the post are those of Commissioners Jackson, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); and The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here).

[On September 18, 2019], the Commission finalized the rollback of the Volcker Rule—the risktaking limits that keep banks from gambling with taxpayer money. These limits are designed to help regulators address a basic problem of incentives: bankers, anticipating taxpayer-funded bailouts, prefer to take excessive risks to maximize their bonuses. [1] That’s why I’ve called upon my colleagues to finalize the rules required by the Dodd-Frank Act to prohibit pay practices that reward excessive risktaking. Instead, having done nothing about banker bonuses, we are weakening structural limits on risk.

As always, I am grateful to my colleagues on the Staff in the Division of Trading and Markets for their hard work. But, as I said at the proposal stage, “[r]olling back the Volcker Rule while failing to address pay practices that allow bankers to profit from proprietary trading puts American investors, taxpayers, and markets at risk.” [2] That’s no less true today than it was a year ago, so I respectfully dissent.


Are Early Stage Investors Biased Against Women?

Michael Ewens is Associate Professor of Finance and Entrepreneurship at the California Institute of Technology and Richard Townsend is Assistant Professor of Finance at the UCSD Rady School of Management. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

It is well known that there is a significant gender gap in high-growth entrepreneurship. The persistence of this gap over time runs counter to more general labor market trends. Several potential explanations have been proposed, including gender differences in technical training or risk preferences. However, many have also speculated that part of the gender gap may, in fact, be due to a lower propensity for investors to fund female entrepreneurs seeking capital. This view largely stems from the fact that over 90% of venture capitalists (VCs) are men. In this article, we directly examine whether female entrepreneurs are at a disadvantage in raising capital due to their gender and if so, why.

To examine these questions, in our article we use a proprietary data set obtained from AngelList, a popular online platform that connects investors with seed-stage startups. Companies create profiles on AngelList describing their businesses and founding teams. They can then start a fundraising campaign wherein they specify the amount of capital they are trying to raise along with other desired deal terms. Accredited investors—both angels and VCs—can register on the platform and subsequently connect with companies seeking funds,


Stakeholder Governance—Some Legal Points

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 memorandum by Mr. Lipton, Steven A. Rosenblum, William Savitt, Karessa L. Cain, and Sabastian V. Niles.

Recently, a number of questions have been raised about the legal responsibilities of directors in pursuing long-term sustainable business strategies and taking into account ESG (environmental, social, governance) factors and the interests of all the stakeholders in the corporation. The following are key parts of the answers we have been giving.

  1. The purpose of a corporation is long-term business success and long-term increase in the corporation’s value.
  2. Shareholders elect the directors of a corporation and thereby have the power to determine the composition of the board of directors.
  3. The directors of a corporation have a fiduciary duty to the corporation to use their business judgment to promote its long-term business success and increase in value.


Weekly Roundup: September 13-19, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 13-19, 2019.

Financial Contracting with the Crowd

Audit Committee Reports to Shareholders

Market Based Factors as Best Indicators of Fair Value

PE Sale of Portfolio Company to a SPAC

Is Your Board Accountable?

Reforming Pensions While Retaining Shareholder Voice

Modernizing Bank Merger Review

Trends in Executive Compensation

Setting Directors’ Pay Under Delaware Law

Words Speak Louder Without Actions

New Policy for Shareholder Proposal Rule

Directors’ Duties in an Evolving Risk and Governance Landscape

Page 3 of 9
1 2 3 4 5 6 7 8 9