Monthly Archives: November 2019

FinTech, BigTech, and the Future of Banks

René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on his recent paper.

In my paper titled FinTech, BigTech, and the Future of Banks, I examine how FinTech and BigTech impact the future of banks. For this article, FinTech is defined as financial innovation based on the use of digital technologies and big data. BigTech firms are “technology companies with established presence in the market for digital services” according to the BIS.

Despite all the excitement about FinTech and the dire warnings about the threat it poses to traditional banks, from 2013 to mid-2019, the Dow-Jones U.S. Banks Index more than doubled and more than held its own with respect to the S&P 500. There is no evidence that the stock market prices bank stocks as if banks were an endangered species. Does this mean that banks can ignore FinTech and BigTech? That they do not represent a competitive threat to banks? That banks are safe from disruption? Or is the stock market just confused about the prospects of banks?


Annual Review and Analysis of 2019 U.S. Shareholder Activism

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

  • Starboard, Ancora, Icahn and Elliott lead the way with the most publicly announced campaigns against U.S. issuers through August
  • Board seats obtained per announced campaign remain at elevated levels, as activists on average obtained 0.7 board seats per 2019 campaign (a 35% increase from 2017)
  • Despite the recent focus in shareholder discourse on “purpose” and maximizing value for all stakeholders, institutional investors appear to give activists a pass on ESP topics
  • Active managers are increasingly adopting activist tactics, highlighted by Neuberger Berman’s proxy contest at Verint Systems
  • Activists are focused on M&A in record numbers, either by agitating for sales or divestitures or by intervening to break up previously announced transactions
  • Almost 50% of issuers that added activist designees to their boards in 2017 or 2018 have since either sold themselves or engaged in a meaningful divesture
  • Activists continue to hone in on issuers without a permanent CEO or with impending CEO retirements, evidenced by several prominent 2019 campaigns


Activism activity levels thus far in 2019 have remained largely consistent with prior years. Activists launched 205 new campaigns through the end of August and won 76 board seats, as compared to 203 new campaigns and 113 board seats through the end of August last year.


Entire Fairness Review of Tesla CEO Compensation

Robert A. ProfusekLizanne Thomas, and James P. Dougherty are partners at Jones Day. This post is based on a Jones Day memorandum by Ms. Thomas, Mr. Profusek, Mr. Dougherty, Randi C. Lesnick, and Jennifer C, Lewis. This post is based on their Jones Day 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 Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here), The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein, and Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

A Tesla shareholder challenged a unique and extremely lucrative equity grant to Elon Musk, claiming that the directors’ decision to approve the pay package breached their fiduciary duties. The compensation consisted of stock options that only vested upon Tesla’s achievement of extraordinary market cap and operational milestones, with a value to Musk of up to a staggering $55.8 billion.

The performance award was approved by Tesla’s independent compensation committee and its full board of directors, with Musk and his brother recusing themselves. The award, which was also conditioned on the approval of a majority of the disinterested shares, was approved by 73% of the disinterested shares voted, or 47% of the outstanding disinterested shares.

The Chancery Court acknowledged that although the ratifying shareholder vote would justify business judgment review in ordinary circumstances, it was insufficient in the case of compensation granted to a controlling shareholder, even in the situation, such as this one, where the shareholder vote is made on a fully informed basis. Accordingly, the Chancery Court denied the directors’ motion to dismiss, holding that the exacting “entire fairness” standard of review was warranted in the circumstances, in part because fewer than a majority of the disinterested shareholders voted to ratify the award.


Retail Shareholder Participation in the Proxy Process: Monitoring, Engagement, and Voting

Alon Brav is Robert L. Dickens Professor of Finance at Duke University Fuqua School of Business; Matthew D. Cain is a senior fellow at the University of California, Berkeley; and Jonathon Zytnick is a PhD candidate at Columbia University. This post is based on their recent paper.

A central premise of corporate governance research is the shareholder collective action problem. Shareholders, the ultimate economic beneficiaries of firms, are by commonly-accepted wisdom dispersed and rationally apathetic, unable to effectively monitor firms. Research tends to focus on those who are hired to act for shareholders’ ultimate economic benefit: the management and directors, and, in more recent decades, the institutional investors which have become the primary channels of investment for most individuals. Much of the research on retail shareholders in the finance literature has focused on their buying and selling decisions while there is little research on their voting decisions. The rise in the importance of corporate governance over the past several decades has brought with it a new focus on the role of institutions as monitors acting on behalf of their underlying investors. Little is known, however, about how retail shareholders monitor and communicate with the managements of their portfolio firms. While previous research has produced extensive empirical analysis on institutional investor (i.e. non-retail) voting, the question of how actual retail shareholders vote has not been addressed, mostly due to lack of data availability.


Judicial Deference on Executive Compensation Decisions

David Berger and Brad Sorrels are partners and Lori Will is of counsel at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Berger, Mr. Sorrell, Ms. Will, Katherine Henderson, Amy Simmerman, and Ryan Greecher. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently denied two books and records demands made by stockholders of Facebook, Inc. that sought to investigate alleged wrongdoing surrounding Facebook’s executive compensation practices at a time when its advertising revenues were declining. In Southeastern Pennsylvania Transportation Authority v. Facebook, Inc., Vice Chancellor Joseph R. Slights III found that the stockholder plaintiffs lacked a proper purpose for the demands because they could not demonstrate a “credible basis” to suspect any disloyal conduct by the board. The court also found that—even if the plaintiffs had stated a proper purpose—Facebook had already turned over all “necessary and essential” information. The decision is instructive for companies faced with books and records demands seeking to investigate potential board misconduct. The case is also a useful reminder that decisions about executive compensation are—absent a board conflict, a controlling stockholder conflict, or waste—a classic business judgment to which the courts will defer.


2019 U.S. Spencer Stuart Board Index

Julie Hembrock Daum is a Consultant, Laurel McCarthy is a Senior Associate, and Ann Yerger is an Advisor of the North American Board Practice at Spencer Stuart. This post is based on the 2019 U.S. Spencer Stuart Board Index.

The 2019 U.S. Spencer Stuart Board Index finds that boards are heeding the growing calls from shareholders and other stakeholders and adding new directors with diversity of gender, age, race/ethnicity and professional backgrounds. However, because boardroom turnover remains low, with the new directors representing only 8% of all S&P 500 directors, changes to overall numbers continue at a slow pace.

Key Takeaways—2019 Spencer Stuart Board Index

Diversity is a priority

Of the 432 independent directors added to S&P 500 boards over the past year, a record-breaking 59% are diverse (defined as women and minority men), up from half last year. Women comprise 46% of the incoming class. Minority women (defined as African-American/Black, Asian and Hispanic/Latino) comprise 10% of new S&P 500 directors, and minority men 13%.


Getting Tired of Your Friends: The Dynamics of Venture Capital Relationships

Qianqian Du is Assistant Professor at the Hong Kong Polytechnic University and Thomas Hellmann is DP World Professor of Entrepreneurship and Innovation at the University of Oxford. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups (discussed on the Forum here) and Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley (discussed on the Forum here), both by Jesse Fried and Brian Broughman.

The received wisdom is that stronger relationships reinforce over time and lead to better deals. Examining investor relationships in the venture capital (VC) industry we challenge this received wisdom by identifying circumstances where relationships weaken over time, and can even lead to lower performance.

Our central research question is how investor relationships evolve over time under a variety of conditions. For this we examine the investment history of the fifty most active U.S. venture capital firms between 1985 and 2012, constructing a sample of approximately 1.4 million real and hypothetical coinvestment opportunities. Our empirical analysis proceeds in three main steps. We first test whether the past strength of networks affects the likelihood of future coinvestments. After we introduce VC-pair fixed effects to the regression analysis, they absorb all cross-sectional variation across VC-pairs, which enables us to focus on the relationship dynamics within a pair of VCs. We find that, within a pair of VCs, the more they coinvested in the past, the less likely they will coinvest in the future. This may come as a surprise as the prior literature might leave the impression that deep relationships should lead to further coinvestments. The fact that we find the opposite suggests that there are countervailing forces that over time weaken stronger (and strengthen weaker) relationships. Hence the paper’s title is about “getting tired of your friends”.


Women in the Boardroom: A Global Perspective

Dan Konigsburg is the Global Corporate Governance Leader at Deloitte Touche Tohmatsu Limited (DTTL). This post is based on a Deloitte publication.

Deloitte Global’s sixth edition of Women in the Boardroom: A Global Perspective shares the latest statistics on global boardroom diversity, exploring efforts and regulation in 66 countries to increase gender diversity in their boardrooms while featuring insights on the political, social, and legislative trends behind the numbers.

Globally, women hold just 16.9 percent of board seats, a 1.9 percent increase from the report’s last edition published in 2017. The numbers underscore a now-familiar challenge: women are largely under-represented on corporate boards, and progress to change this trend continues to be slow. If the global trend continues at its current rate of an approximately 1 percent increase of women on boards per year, it will take more than 30 years to achieve global gender parity at the board level. And even then, actual parity is likely to be concentrated to the few countries that are currently making concerted efforts to overcome this issue, leaving several regions lagging behind.


Board Pay Under the Microscope

Rebecca Burton is a lead associate and Peter Kim is an associate at Willis Towers Watson. This post is based on a Willis Towers Watson memorandum.

Director pay programs are under greater scrutiny, and S&P 500 companies are striving to anticipate and adapt to this significant change. Compensation limits are at the forefront of this keen interest, with advisory firms Institutional Shareholder Services and Glass Lewis, and shareholders, becoming more vocal and taking direct action. This activism is framed by trends that include avid internal and external interest in board diversity and a shift in board compensation with greater emphasis on equity than on cash pay.

Willis Towers Watson’s Global Executive Compensation Analysis team (GECAT) reviewed and compared S&P 500 director pay program results in 2019 with data from 2018. Figure 1 is an overview of director pay elements with a focus on percentiles and prevalence. Figure 2 breaks out year-over-year changes of the same director pay elements at the median.

The Effects of Recent Proposed CFIUS Regulations on Fund Managers

Peter Halasz is a partner and Gregory Kinzelman is special counsel at Schulte Roth & Zabel LLP. This post is based on their Schulte Roth & Zabel memorandum.

The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) has made compliance with increasingly complex Committee on Foreign Investment in the United States (“CFIUS”) rules an important part of a fund manager’s job if any of its funds have foreign investors. Before FIRRMA, CFIUS jurisdiction only applied to transactions where a foreign entity acquired control over a U.S. business (defined as “any entity engaged in interstate commerce in the United States”) and all CFIUS filings were voluntary. This meant that both U.S. funds with foreign investors and foreign investment funds whose U.S. investments were limited to real estate and minority investments in public and private companies had no reason to worry about CFIUS compliance.

FIRRMA has changed that. FIRRMA now extends CFIUS jurisdiction for the first time to cover certain minority investment in U.S. businesses and U.S. real estate acquisitions by or made on behalf of foreign investors, and in some instances, as explained below, to require mandatory reporting prior to closing. On Sept. 17, 2019, the U.S. Department of the Treasury issued over 300 pages of additional proposed rules to implement FIRRMA, which will take effect when made final sometime before the Feb. 13, 2020 statutory deadline. We summarize below the takeaways fund managers should know about the new proposed regulations.


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