Yearly Archives: 2019

The Future of Shareholder Activism

Posted by Assaf Hamdani (Tel Aviv University) and Sharon Hannes (Tel Aviv University), on
Thursday, July 25, 2019
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Assaf Hamdani is Professor of Law and Sharon Hannes is Professor of Law and Dean of the Faculty at Tel Aviv University Buchmann Faculty of Law. This post is based on their recent article, forthcoming in the Boston University Law Review. 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 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).

Two major developments are shaping modern capital markets. The first development is the dramatic increase in the size and influence of institutional investors, mostly mutual funds. Institutional investors today collectively own 70-80% of the entire U.S. capital market, and a small number of fund managers hold significant stakes at each public company. The second development is the rising influence of activist hedge funds, which use proxy fights and other tools to pressure public companies into making business and governance changes.

Our new article, The Future of Shareholder Activism, prepared for Boston University Law Review’s Symposium on Institutional Investor Activism in the 21st Century, focuses on the interaction of these two developments and its implications for the future of shareholder activism. We show that the rise of activist hedge funds and their dramatic impact question the claim that institutional investors have conflicts of interest that are sufficiently pervasive to have a substantial market-wide effect. We further argue that the rise of money managers’ power has already changed and will continue to change the nature of shareholder activism. Specifically, large money managers’ clout means that they can influence companies’ management without resorting to the aggressive tactics used by activist hedge funds. Finally, we argue that some activist interventions—those that require the appointment of activist directors to implement complex business changes—cannot be pursued by money managers without dramatic changes to their respective business models and regulatory landscapes.

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A Look inside H.R. 2534: Insider Trading Prohibition Act

Posted by Rahul Mukhi, Shannon Daugherty, and Destiny D. Dike, Cleary Gottlieb Steen & Hamilton LLP, on
Thursday, July 25, 2019
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Rahul Mukhi is a partner, Shannon Daugherty is an associate, and Destiny D. Dike is a law clerk at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Last month, Representative Jim Himes (D-Conn) and his co-sponsors, Representatives Carolyn B. Maloney (D-NY) and Denny Heck (D-WA), introduced H.R. 2534:  The Insider Trading Prohibition Act. Unlike its substantially similar predecessor, H.R. 1625, which was introduced by Representative Himes on March 25, 2015, H.R. 2534 has gained some momentum in the U.S. House of Representatives, having been unanimously approved by the Financial Services Committee in May 2019. Although the bill is only at the preliminary stage, if the proposal eventually proceeds further in the process of becoming law, it will represent a potentially significant shift in and clarification of U.S. insider trading laws.

Background

Current insider trading prohibitions arise from judicial case law interpreting Section 10(b) of the Securities Exchange Act of 1934 codified in 15 U.S.C. § 78j and the U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5. This current state of judge-made law has increasingly come under attack for lack of certainty and clarity. [1] Some also have argued that the courts’ rooting of insider trading law in “deception” and breach of a duty fails to capture insider trading in the digital age. And others have argued that the lack of a statute specifically addressing insider trading has led to inconsistent interpretation and application by regulators and courts, particularly in the context of remote tippees, thus making it difficult for market participants to understand how to conform their conduct to the law. [2]

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Proxy Voting Outcomes: By the Numbers

Posted by Barbara Novick, BlackRock, Inc., on
Wednesday, July 24, 2019
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Barbara Novick is Vice Chairman at BlackRock, Inc. This post is based on a Policy Spotlight issued by Blackrock.

Index funds have democratized access to diversified investment for millions of savers who are investing for long-term goals, like retirement. The popularity of index funds has, however, drawn critics who claim that index fund managers may wield outsized influence over corporations due to the size of their shareholdings in public companies. Some commentators speculate that the largest asset managers are determining the outcome of proxy votes. Central to this hypothesis is an assumption that the shareholdings of the largest asset managers are sufficiently sizeable to determine the outcome of proxy votes. An analysis of the margins by which proxy votes are won or lost demonstrates that this is rarely the case.

Director Elections

The Russell 3000 index is a broad-based index comprised of the 3,000 largest US public companies by market capitalization and thus provides a broad sample of US companies from which to analyze proxy voting activity. Assuming that a single asset manager can vote 10% of a company’s shares, Exhibit 1 shows that during the 2017-2018 proxy season, less than 1% of Russell 3000 director elections could have been decided by a 10% shareholder changing their vote. In addition, Exhibit 1 shows that in the 2017-2018 proxy season, 95% of Russell 3000 director elections were won by a margin greater than 30%. This means that even three 10% shareholders changing their votes in the same direction would not have changed the outcome.

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The Importance of Climate Risks for Institutional Investors

Posted by Philipp Krueger (University of Geneva), Zacharias Sautner (Frankfurt School of Finance & Management), and Laura T. Starks (University of Texas), on
Wednesday, July 24, 2019
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Philipp Krueger is Associate Professor of Finance at the University of Geneva; Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management; and Laura T. Starks is the Charles E. and Sarah M. Seay Regents Chair in Finance at the University of Texas at Austin McCombs School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Climate risks have potentially large effects on investors’ portfolio companies. Some companies face direct costs related to changes in the climate, originating from extreme weather events or a general rise in sea levels. Other companies can be negatively affected from policies and regulations implemented to combat climate change. Technological innovations related to climate change also threaten the business models of some portfolio firms that operate in traditional industries. These risks to portfolio companies, which can broadly be categorized into physical, regulatory, and technological climate risks, have the potential to adversely affect the outcomes for many clients, pension beneficiaries, and shareholders of institutional investors. At the same time, climate change also provides investment opportunities for the portfolio companies and their institutional investors, for instance in the areas of renewable energy or energy storage.

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What Happened at the Corp Fin Roundtable on Short-Termism?

Posted by Cydney Posner, Cooley LLP, on
Wednesday, July 24, 2019
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Stock Market Short-Termism’s Impact by Mark Roe, (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).

Corp Fin has recently focused on the issue of corporate reporting and short-termism. At the end of last year, the SEC posted a “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.” (See this PubCo post.) Following up, Corp Fin then organized a roundtable, held last week, to discuss the issues surrounding short-termism. The roundtable consisted of two panels: the first explored “the causes and impact of a short-term focus on our capital markets,” with the goal of identifying potential market practices and regulatory changes that could promote long-term thinking and investment. In part, this panel developed into a debate about whether short-termism was actually creating a problem for the economy at all. In that regard, several of these panelists were quick to cite the oft-cited academic study revealing that “three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report.” (See this PubCo post and this article in The Atlantic.) Could the reason be a misalignment of incentives? The second panel was centered on the periodic reporting system and potential regulatory changes that might encourage a longer-term focus in that system. Does the current periodic reporting system, along with the practice of issuing quarterly earnings releases and, in some cases, quarterly earnings guidance contribute to or encourage an overly short-term focus by managers and other market participants? On this panel, the headline topic notwithstanding, the discussion barely touched on short-termism; rather, the focus was almost entirely on regulatory burden. At the end of the day, is the SEC seriously considering making changes to periodic reporting?

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Under Pressure: Directors in an Era of Shareholder Primacy

Posted by Jim Rossman, Christopher Couvelier, and Quinn Pitcher, Lazard, on
Tuesday, July 23, 2019
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Jim Rossman is Head of Shareholder Advisory, Christopher Couvelier is Director, and Quinn Pitcher is an analyst at Lazard. This post is based on their Lazard memorandum.

The job of the public company director has never been as challenging as it is in 2019. Today’s directors must execute their core duties while juggling a cacophony of often competing voices: activist investors; increasingly vocal “traditional” owners; index and pension funds wielding the power of their vote; shareholders demanding action on environmental, social and governance issues; employees and unions; local and national political leaders; social media; and of course management itself. Where does a director’s duty reside in this complex landscape? And amid this dissonance, how should today’s director prioritize these many demands?

In pursuit of answers to these questions, Lazard recently hosted “Under Pressure: Directors in an Era of Shareholder Primacy,” an event attended by over 150 directors representing over 200 public companies around the world. The event began with a panel discussion moderated by Dennis K. Berman (Managing Director, Lazard Shareholder Advisory) and featured representatives from academia, regulators, investors and public companies:

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How Much Do Directors Influence Firm Value?

Posted by Aaron Burt (University of Oklahoma), Christopher Hrdlicka (University of Washington), and Jarrad Harford (University of Washington), on
Tuesday, July 23, 2019
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Aaron Burt is Assistant Professor of Finance at the University of Oklahoma Price College of Business; Christopher Hrdlicka is Assistant Professor of Finance and Business Economics at the University of Washington Foster School of Business; and Jarrad Harford is Professor of Finance and Chair of the Department of Finance and Business Economics at the University of Washington Foster School of Business. This post is based on their recent article, forthcoming in the Review of Financial Studies.

Every company has a board of directors. Debates rage over whether they do their job; what is the ideal mix of insiders and outsiders, men and women, management and labor; and whether directors are too busy or whether busyness is an outcome of quality. But until now, we have not even been able to answer the most basic question: How much do directors actually influence the value of companies?

To be fair, this is a hard question to answer. Much about boards is unobservable. Board meetings are private, with the minutes only rarely being made public. Directors work with management outside of these meetings, making it impossible to see all the relevant interactions. Worse, we cannot simply look at arrivals and departures of directors because of the endogenous matching between a director and company.

Narrowing the question to particular events like mergers and acquisition have allowed a glimpse of director influence. Natural experiments such as mandates on the female fraction of boards or the unexpected death of a director also show boards matter. The effects of directors have even been traced to commonality in events such as switching exchange listings, or commonality in practices, such as similar tax minimization strategies. Taken together, prior studies have shown a vast array of director influence in specific instances, but they cannot answer how much do directors influence firms overall. Their answers are limited both because they utilize only a subset of events and because there is no obvious way of aggregating over the events studied.

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First Successful Use of a Universal Proxy Card for a Control Slate in the United States

Posted by Steve Wolosky, Andrew Freedman, and Elizabeth Gonzalez-Sussman, Olshan Frome Wolosky LLP, on
Tuesday, July 23, 2019
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Steve Wolosky, Andrew Freedman, and Elizabeth Gonzalez-Sussman are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Wolosky, Mr. Freedman, Ms. Gonzalez-Sussman, and Mohammad Malik. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

On July 10, 2019, shareholders at EQT Corporation (“EQT” or the “Company”) overwhelmingly voted for a control slate of directors nominated by a shareholder group led by Toby Z. Rice, Derek Rice, Will Jordan and Kyle Derham (the “Rice Team”). Interestingly, this proxy contest involved the use of a universal ballot, a first in the United States involving a control slate of directors, in which all of the company and dissident’s nominees appeared on their respective proxy cards.

EQT is the largest natural gas producer in the United States. In November 2017, the Rice Team sold the company they had founded, Rice Energy, to EQT, for approximately $6.7 billion. Unfortunately, within a year following the acquisition, EQT’s operational performance severely declined, with its shares falling 39% last year. Following a massive operational loss in the third quarter of 2018, many shareholders reached out to Toby Z. Rice for help. Despite efforts to engage with EQT privately, the Rice Team’s offers to help were rebuffed, forcing the Rice Team to call for the replacement of the CEO and nominate a control slate of directors.

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A Banner Proxy Season for Political Disclosure and Accountability

Posted by Bruce F. Freed, Dan Carroll, and Karl J. Sandstrom, Center for Political Accountability, on
Monday, July 22, 2019
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Bruce F. Freed is President and Dan Carroll is Vice President for Programs at the Center for Political Accountability; and Karl J. Sandstrom is senior counsel at Perkins Coie LLP and counsel at CPA. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson Jr. (discussed on the Forum here and here), and The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert Jackson, James David Nelson, and Roberto Tallarita.

Support for corporate disclosure and accountability reached new highs in the just concluded 2019 proxy season. This was demonstrated in the number of companies agreeing to disclosure and board oversight over the full range of their political spending and in the surge in shareholder support for the Center for Political Accountability’s model resolution. All of this reinforces earlier findings about “private ordering” making political disclosure and accountability the new norm for companies.

This proxy season’s strong results were a clear affirmation of trends seen over the past several years. Much of corporate America now sees political disclosure and accountability as in its self-interest and shareholders consider it an essential feature of good governance. This is occurring as companies navigate heightened risks posed by today’s hyper-polarized political environment.

Here are the topline results for this season:

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Does Revlon Matter? An Empirical and Theoretical Study

Posted by Sean J. Griffith (Fordham University), on
Monday, July 22, 2019
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Sean J. Griffith is the T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on a recent paper authored by Professor Griffith; Matthew D. Cain, Visiting Research Fellow at the Harvard Law School Program on Corporate Governance; Robert J. Jackson, Jr., Professor of Law at New York University School of Law; and Steven Davidoff Solomon is Professor of Law at UC Berkeley School of Law. This post is part of the Delaware law series; links to other posts in the series are available here.

In Does Revlon Matter: An Empirical and Theoretical Study, we examine the effect the seminal case of Revlon v. MacAndrews & Forbes Holdings has on the takeover process. We examine this through a novel M&A dataset of 1,913 transactions from 2003-2017. Our unique dataset contains details of the private merger negotiation process before public deal announcements, including the number of bidding rounds, timing of bids, bid premiums, and indicators for single versus multiple bidding parties.

We find, essentially, that Revlon matters, at least for Delaware firms. For Delaware incorporated firms, deals within Revlon result in more protracted negotiations, more rounds of bidding, more bidders, and higher deal premiums. However, these results do not hold for states outside of Delaware that have also adopted Revlon. When we exclude Delaware-incorporated firms, we find no differences in any key variables for Revlon and non-Revlon deals. Revlon matters, but it matters only in Delaware.

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