Monthly Archives: December 2019

Institutional Investment Mandates: Anchors for Long-term Performance

Matthew Leatherman is a Director, Sarah Keohane Williamson is CEO, and Victoria Tellez is a Research Associate at FCLTGlobal. This post is based on their FCLTGlobal report. 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).

Executive Summary

Asset owners—the cornerstones of the investment ecosystem—often have very long-term investment goals, such as funding liabilities, building an endowment for perpetuity, or providing for subsequent generations. For some of these asset owners, especially pension and retirement funds, these goals reflect the long-term needs of individual plan members who rely on these institutions to safeguard and build the savings which they will need down the road. Ensuring assets are managed in line with these long-term horizons is critical to achieving these goals. This presents a challenge, however, because assets are often managed by asset managers, distinct from the asset owners, and managers may have different time horizons, incentives, and goals.

Among the most important elements in ensuring that institutional investor partnerships fulfill long-term objectives are the investment management contracts between asset owners and asset managers, the “mandates.” The terms and conditions embodied in these mandates constitute a mutual mechanism to align the asset managers’ behaviors with the asset owners’ objectives. These contracts define the relationships between asset owners and asset managers and play a crucial role in ensuring the success of these relationships over time.


The Plight of Women in Positions of Corporate Leadership in the United States, the European Union, and Japan: Differing Laws and Cultures, Similar Issues

Cindy A. Schipani is Merwin H. Waterman Collegiate Professor of Business Administration and Professor of Business Law at University of Michigan Ross School of Business. This post is based on a recent paper authored by Professor Schipani; Bettina C.K. Binder, Professor of Business Administration and Engineering at Pforzheim University; Terry Morehead Dworkin, Wentworth Professor of Business Law, Emerita, at Indiana University and Scholar in Residence at Seattle University School of Law; Niculina Nae, Professor of International Studies at Nagoya University of Commerce and Business; and Irina Averianova, Professor of Communications at Nagoya University of Commerce and Business.

Gender diversity on corporate boards is a highly debated issue worldwide. In addition to providing equal opportunity, promoting equality and inclusion of women in positions of leadership is also believed to have positive effects on the financial performance of a company. National campaigns such as “2020 Women on Boards” in the U.S., or “Women on the Board Pledge for Europe” in the EU are just two examples of initiatives that aim to increase female representation in boardrooms. Rising female representation on boards has been identified as a trend for 2020 (Pedro Nueno, 10 Trends for the Board of 2020: The Future of Governance, Harv. Bus. Rev. (2014)), while board configuration is considered to be a “strategic resource of the organization” (Coral Ingley & Nick van der Walt, Board Configuration: Building Better Boards, 3 Corp. Governance: The Int’l J. of Bus. in Soc. 5 (2003)). The European Commission stresses the economic importance of gender diversity on corporate boards, quoting several studies showing correlations between women’s presence on boards and various improved financial metrics. Japan’s Act on Promotion of Women’s Participation and Advancement in the Workplace, enacted in 2016, lays a foundation for establishing targets for promoting women to decision-making positions (Act on Promotion of Women’s Participation and Advancement in the Workplace, Law No. 64 of 2015). Furthermore, we agree with those who argue that the status quo ought to be challenged in international business, both in terms of economic importance and for considerations of equal opportunity and fairness (Patrizia Zanoni, Maddy Janssens, Yvonne Benschop & Stella Nkomo, Unpacking Diversity, Grasping Inequality: Rethinking Difference Through Critical Perspectives, 17 Org. 9 (2010)).


Board-Shareholder Engagement Practices

Matteo Tonello is Managing Director at The Conference Board, Inc. and Matteo Gatti is Professor of Law at Rutgers Law School. This post is based on their Conference Board report, developed in partnership Rutgers Center for Corporate Law and Governance. 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).

Shareholder engagement is increasingly being added to the job description of the corporate director. The phenomenon is the natural evolution of the changes to the corporate governance landscape that have occurred during the last two decades. First, there is the expansion of the board’s oversight responsibilities that resulted from the Sarbanes-Oxley and Dodd-Frank legislations. Second, there is the progress made by the shareholder rights movement, with investors’ claim for a more direct involvement in business decision-making.

This post analyzes and documents emerging practices in the role of the board of directors in the corporate-shareholder engagement process. It is based on a 2018 survey of corporate secretaries, general counsel and investor relations officers at SEC-registered public companies conducted by The Conference Board and Rutgers University’s Center for Corporate Law and Governance (CCLG).


Worker Representation on U.S. Corporate Boards

Lenore Palladino is Assistant Professor at the University of Massachusetts at Amherst. This post is based on her recent paper.

For the last four decades, large corporations in the United States govern themselves according to the model of shareholder primacy. The economic theory underpinning shareholder primacy is that shareholders are the sole corporate stakeholder who makes a risky investment; therefore, the maximization of shareholder value is defended as the sole goal of corporations, and management agents owe allegiance only to the shareholder principals. As it stands, workers have no part in making the decisions that determine the future of the corporation they work for: who to hire and how to compensate a CEO, whether to merge or acquire another firm, what kind of shareholder payments to authorize, and a wide variety of other key decisions.

My paper, Worker Representation on U.S. Corporate Boards, argues that workers should have representation on corporate boards of directors and explores the policy choices in the U.S. economy of the 21st century to achieve the goal of worker representation on corporate boards. Effectively implementing such a reform requires consideration of key issues, including: how many corporate directors should represent employees; how they should be chosen and who counts as a worker when the choice is made; how they should meaningfully represent workers, and what information the board owes the workforce; how these choices are different in a unionized or non-union context; and the relationship between a worker’s role as director and employee, in terms of pay, time, and protection from repercussions at work. READ MORE »

New Considerations for Special Litigation Committees

Roger Cooper, Jared Gerber and Victor Hou are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Messrs. Cooper, Gerber, Hou, Rahul Mukhi, Rishi Zutshi, and Mark McDonald, 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

On December 4, 2019, Vice Chancellor Sam Glassock III issued a memorandum opinion in In re Oracle Corporation Derivative Litigation finding that the Lead Plaintiff in a shareholder derivative suit against Oracle’s board of directors had the right to subpoena documents relied upon by the corporation’s Special Litigation Committee (SLC) in making its determination as to whether litigation against Oracle should be allowed to proceed, including privileged documents Oracle had produced to the SLC. While the procedural posture of this case was unusual—the SLC had decided 1) that claims against its founder and chairman should proceed, and 2) that the Lead Plaintiff should be the one to prosecute those claims—the Court’s decision has potential ramifications for SLCs in the future. SLCs should, therefore, be cognizant of these potential ramifications when they collect and prepare documents in connection with an investigation.


In July 2016, Oracle announced that it would be acquiring Netsuite, a cloud computing company. Lawrence J. Ellison, the co-founder and chairman of Oracle and a 35% shareholder in it, was also the co-founder and a 39% shareholder of Netsuite. The transaction closed in November of that year.


Public Company vs. JV Governance

James Bamford is a Managing Director and Tracy Branding and Lois D’Costa are Directors at Water Street Partners LLC. This post is based on their Water Street memorandum.

The governance of public companies is profoundly important. Thirty years ago, CalPERS, a major institutional investor and leading corporate governance advocate, argued that corporate governance was “the grain in the balance that makes the difference between wallowing for long and perhaps fatal periods in the depths of the performance cycle, and responding quickly to correct the corporate course.” Time and again, research has borne out the link between good governance and strong shareholder returns.

Increasingly, public companies are entering into joint ventures—to access new markets, combine capabilities, gain scale, or share risk. The largest oil and gas companies in the world, including Shell, ExxonMobil, and BP now draw the vast majority of their current upstream production from joint ventures, with more than 50% of production coming from ventures they do not operate. Meanwhile, the largest automakers and industrial firms, including General Motors, Siemens, and Volkswagen, derive a substantial share of their revenue, profits, and risk exposure from joint ventures, especially in China. [1]


Managerial Control Benefits and Takeover Market Efficiency

Wenyu Wang is Associate Professor of Finance at Indiana University Kelley School of Business and Yufeng Wu is Assistant Professor of Finance at University of Illinois at Urbana-Champaign Gies College of Business. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk.

The takeover market plays a crucial role in reallocating assets and stimulating economic growth. In 2016 alone, public firms in the United States exchanged $600 billion worth of assets, which accounted for 32% of their total investments. Much of this asset reallocation is shaped by entrenched managers’ preferences for acquiring control benefits. As Jensen and Meckling (1976) point out, these preferences can destroy significant value in the market for corporate control. However, at the same time, it is likely that incumbent managers’ fear of losing their control benefits also generates a bright-side effect: intuitively, when managers enjoy high control benefits, they have an ex ante incentive to work harder when the firm underperforms to avert a takeover threat.

In this study, we revisit how the efficiency of the takeover market is influenced by managerial control benefits, quantifying both the traditional losses in value that stem from managers’ desire to gain more control and the positive effects of control preferences on incentivizing managerial effort. Our empirical methodology is structural estimation, which is an attempt to fit an economic model to the data, assess how well the model fits the data, and measure fundamental economic parameters. This methodology is common in certain fields of economics, such as industrial organization, and it is becoming more popular in corporate finance.


SEC Proposes to Expand Definition of “Accredited Investor”

Jessica Forbes and Stacey Song are partners and Christine Zhao is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum.

On December 18, 2019, the Securities and Exchange Commission (the “SEC”) published for comment proposed amendments to the definition of “accredited investor” under the Securities Act of 1933, which would expand the category of investors eligible to participate in private offerings under Regulation D. [1] The amendments would create new categories of accredited investors, including those that qualify irrespective of wealth, on the basis that they have the requisite ability to assess an investment opportunity. The amendments would also codify certain staff interpretative positions. Key changes proposed are discussed at a high level below.

New Categories of Accredited Investors

The SEC proposes to expand the categories of accredited investors for both natural persons and entities.


Institutional Trading around Corporate News: Evidence from Textual Analysis

Alan Guoming Huang is Associate Professor of Finance at the University of Waterloo, Hongping Tan is Associate Professor at McGill University’s Desautels Faculty of Management, and Russ Wermers is the Bank of America Professor of Finance at the University of Maryland. This post is based on their paper, forthcoming in the Review of Financial Studies.

Institutional investors now own over 60% of corporate equities, and account for an even greater proportion of trading volume. Accordingly, institutions play a large role in the incorporation of new information into market prices. However, the mechanism of how institutional investors use information to trade, and how quickly their information-motivated trades are reflected in stock prices is not clear.

This paper studies two high frequency databases to address these issues. First, we construct the most comprehensive corporate news database academically studied, to date, for the period 2000 to 2010 (from the Top Sources of Factiva). This database contains a much broader set of news than prior research based on news releases, and it contains the vast majority of news wire releases, which include their precise time-stamps. Second, we use a high-frequency institutional trading database that holds the precise trades made by institutional investors consisting of about 10% of the market’s overall trading volume over the same time-period. We merge these two datasets to study the reaction to, or prediction of, institutions to the tone of various news events about corporations (i.e., “negative news” or “positive news” by counting the quantity of sentiment words in each news article). We also measure the impact of institutional trading following news events on ensuing stock returns to determine the role institutional high-frequency trading plays in incorporating news into stock prices.


SEC Resource Extraction Payments Rule—Third Time’s the Charm?

Sandra L. Flow and Nicolas Grabar are partners and Nina E. Bell is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum authored by Ms. Bell, Ms. Flow, Mr. Grabar, and Stephen Janda.

On December 18, 2019, a divided SEC issued a new proposed rule on the disclosure of resource extraction payments. The proposal comes almost three years after a 2016 iteration of the rule was disapproved by a joint resolution of Congress, six years after a federal court vacated the 2012 iteration of the rule and nine years after the Dodd-Frank Act first required the SEC to adopt the rule.

The SEC was faced with the daunting task of crafting a new proposal that manages to meet the detailed directive in the underlying statute, comply with the Congressional Review Act prohibition on reissuing the 2016 rule in substantially the same form and address the issues that had caused the court to vacate the 2012 rule. As a result, the new proposed rule is similar in many ways to both prior iterations, but there are some important differences, most of which are favorable to affected companies as they expand available exemptions and attempt to both reduce the risk of competitive harm and ease compliance burdens.


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