Yearly Archives: 2019

Beyond Beholden

Posted by Da Lin (Harvard Law School), on
Wednesday, March 13, 2019
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Da Lin is Lecturer on Law at Harvard Law School. This post is based on her recent article, forthcoming in the Journal of Corporation Law. 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).

Corporate law has long been concerned with director independence. In controlled companies, the perceived problem is that directors might feel pressured to reciprocate a past kindness from the controlling shareholder or fear retaliation. As a result, the conventional marker of independence is the absence of substantial prior or ongoing relationships to the controlling shareholder.

In my forthcoming article, Beyond Beholden, I challenge that standard narrative. I argue that the prospect of future rewards from the controlling shareholder also influences director behavior. Simply put, directors may be motivated to be on good terms with controlling shareholders because controlling shareholders may reward them in return.

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Pre-Litigation Demand and Director Committees

Posted by Richard S. Horvath, Jr, Allen Matkins Leck Gamble Mallory & Natsis LLP, on
Wednesday, March 13, 2019
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Richard S. Horvath, Jr, is partner at Allen Matkins Leck Gamble Mallory & Natsis LLP. This post is based on his Allen Matkins memorandum and is part of the Delaware law series; links to other posts in the series are available here.

On February 12, 2019, in the matter captioned City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, et al., C.A. No. 2017-0341-KSJM, Vice Chancellor McCormick of the Delaware Court of Chancery provided further guidance on the pre-litigation demand requirement. This decision reaffirms and applies the principle under Delaware law that, while a pre-litigation demand “tacitly concedes” a board of directors is disinterested and independent for purposes of responding to the demand that concession only goes so far. As such, the board, or a subcommittee designated with the task of investigating and responding to the demand, must still in fact act independently, disinterestedly, in good faith, and with due care. While the derivative claims in Corvi were ultimately dismissed, the Court’s decision provides a helpful outline of the steps a board of directors should take in responding to a pre-litigation demand.

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Rule 14a-8 Exceptions and Executive Compensation

Posted by Cydney Posner, Cooley LLP, on
Tuesday, March 12, 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 Case for Increasing Shareholder Power by Lucian Bebchuk.

In October last year, Corp Fin issued a new staff legal bulletin on shareholder proposals, 14J, that examined the exception under Rule 14a-8(i)(7), the “ordinary business” exception, addressing, among other topics, the application of the rule to proposals related to executive or director comp. Post-shutdown, Corp Fin has now posted several no-action responses that consider the exception in that context. Do they provide any color or insight?

Executive comp or ordinary business?

One of the issues addressed in the SLB is how the staff approaches the application of Rule 14a-8(i)(7) to proposals that, in addition to implicating executive/director comp, also involve ordinary business matters. The question the staff then asks is: what is the real underlying focus of the proposal? Is it really concerned primarily with senior executive and/or director compensation, or is it just styled as an executive comp proposal, but “its underlying concern relates primarily to ordinary business matters that are not sufficiently related to senior executive and/or director compensation”? The goal is to avoid elevating form over substance so that “a proposal is not included simply because it addresses an excludable matter in a manner that is connected to or touches upon senior executive or director compensation matters.” Elsewhere in the SLB, the staff notes that, in “determining whether the focus of a proposal is senior executive and/or director compensation or, instead, an ordinary business matter, we consider both the resolved clause and supporting statement as a whole.”

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Behavioral Foundations of Corporate Culture

Posted by Ernst Fehr (University of Zurich), on
Tuesday, March 12, 2019
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Ernst Fehr is Professor of Economics at the University of Zurich. This post is based on a recent paper by Professor Fehr.

Talking about corporate culture has become quite popular in the business world. But why should companies care about corporate culture at all? Why do “soft” concepts like culture matter? Can’t companies simply rely on “hard” economic forces—the value of clear and efficient institutional rules and their associated financial incentives?

Corporate culture is important because human behavior is always co-determined by the set of social norms that prevail in a company and are the core of its culture. It is in the company’s interest to shape these norms through a cooperative culture that mobilizes employees’ voluntary cooperation in the pursuit of the firm’s overall goals. Our research provides behavioral foundations for cooperative culture, based on important scientific insights from experimental and behavioral economics as well as from contract economics.

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Everything Old is New Again—Reconsidering the Social Purpose of the Corporation

Posted by Holly J. Gregory, Sidley Austin LLP, on
Tuesday, March 12, 2019
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Holly J. Gregory is partner at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, previously published in Ethical Boardroom. 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).

At a time when trust in US business is at an all-time low, according to the Edelman Trust Barometer, the idea that the corporation should be run solely for the benefi of the shareholders is being questioned, including by large institutional shareholders. [1]

In a recent survey of 500 institutional investors, Edelman found that investors are increasingly taking into account as investment factors longer-term social and environmental considerations and the corporation’s cultural health. They are also expecting companies to take a stand on relevant social issues. A full 98 per cent of investors surveyed indicated that “public companies are urgently obligated to address… societal issues to ensure the global business environment remains healthy and robust”. [2]

The top five issues of concern cited were cybersecurity, income inequality, workplace diversity, national security and immigration. More broadly, in his January 2018 letter to CEOs, BlackRock CEO Larry Fink discussed the need for portfolio companies to have a “sense of purpose” and shared his view that to “prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate”. [3]

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Technology and the Boardroom: A CIO’s Guide to Engaging the Board

Posted by Khalid Kark, Tonie Leatherberry and Debbie McCormack, Deloitte LLP, on
Monday, March 11, 2019
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Khalid Kark is a director, Tonie Leatherberry is a principal, and Debbie McCormack is a managing director at the Center for Board Effectiveness, all at Deloitte LLP. This post is based on a Deloitte memorandum by Mr. Kark, Ms. Leatherberry, Ms. McCormack, and Minu Puranik.

Because technology is a crucial part of business strategy, boards and CIOs may need to elevate their engagement and collaboration with each other. How can CIOs lead and guide the conversation about technology’s impact on business trajectory?

Technology is a strategic imperative in nearly every organization, regardless of industry, sector, or geography. Few companies are immune to the influence of technology-driven disruption, innovation, or value creation. Business strategy is now largely technology strategy, and high-performing CIOs are both leading technology deployments and helping the business develop and implement technology-enabled business strategies. “There isn’t a single strategy in any business that isn’t enabled by technology,” affirms Sheila Jordan, SVP and CIO of Symantec. “Technology is the common denominator in every single key strategic imperative in every company.

Many board members agree. “As the pace of change quickens, technology now leads and influences business strategy in almost all companies and industries,” says Scott Bonham, board director at Magna, Scotiabank, and Loblaw Companies Limited. “It is imperative for board members to understand these disruptive changes as they relate to technology, guide the organization to go beyond traditional IT conversations, and leverage technology to grow the business.

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The Strategies of Anticompetitive Common Ownership

Posted by Scott Hemphill and Marcel Kahan (New York University School of Law), on
Monday, March 11, 2019
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Scott Hemphill is Professor of Law and Marcel Kahan is George T. Lowy Professor of Law at New York University School of Law. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Horizontal Shareholding (discussed on the Forum here); and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding (discussed on the Forum here), both by Einer Elhauge; and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Institutional investors, such as large mutual funds, often own significant stakes in competing firms. Antitrust theorists have long suggested that common concentrated owners (“CCOs”) have interests that differ from those of owners of a single competing firm and might be able to induce firms in which they hold a stake to further these interests. Recently, empirical evidence indicates that CCOs are associated with various anticompetitive effects. The most important article in this literature is an empirical study of the airline industry that concludes that common ownership of competing airlines, evaluated at the route level, is associated with higher prices on that route.

This new evidence, and the dramatic growth in institutional investors over the last several decades, have stimulated a major rethinking of antitrust enforcement. The Department of Justice, the Federal Trade Commission, and the European Commission have each, to varying degrees, conducted hearings and investigations or expressed concerns about common ownership. Academic commentators have advocated measures that go much further. They urge that funds must cease their ownership of competing firms, shrink to a fraction of their current size, or lose the right to vote their shares in their portfolio companies. These proposals, if adopted, would transform the landscape of institutional investing.

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Corporate Opportunity Waivers in Private Equity and Venture Capital Investments

Posted by Matthew M. Greenberg, Christopher B. Chuff, and Taylor B. Bartholomew, Pepper Hamilton LLP, on
Monday, March 11, 2019
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Matthew M. Greenberg is partner and Christopher B. Chuff and Taylor B. Bartholomew are associates at Pepper Hamilton LLP. This post is based on their Pepper memorandum. This post is part of the Delaware law series; links to other posts in the series are available here.

A recent Delaware Supreme Court order affirming the Court of Chancery’s ruling in Alarm.com Holdings, Inc. v. ABS Capital Partners, Inc. provides important guidance for private equity and venture capital firms that seek to invest in competing businesses. Among other things, the decision stresses the importance of adopting provisions in governing investment documents, including the target’s certificate of incorporation, that permit the PE or VC firms to invest in competing businesses. The decision also cautions that broad corporate opportunity waivers may not be enforceable and that these waivers should be carefully drafted to avoid being declared invalid. Other notable takeaways from the decision are discussed below.

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Equity Market Structure 2019: Looking Back & Moving Forward

Posted by Jay Clayton and Brett Redfearn, U.S. Securities and Exchange Commission, on
Sunday, March 10, 2019
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Jay Clayton is Chairman and Brett Redfearn is Director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission. This post is based on their recent remarks at Gabelli School of Business, Fordham University, available here. The views expressed in this post are those of Mr. Clayton and Mr. Redfearn and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Chairman Clayton: Thank you, Dean Rapaccioli, for your kind introduction and for the invitation to Director Redfearn and me to speak about equity market structure. [1]

I’m delighted that my good friend Craig Phillips was able to take time to be here and lay the groundwork for our speech. Groundwork is the right word; and it extends well beyond today. Secretary Mnuchin, Craig and Craig’s team, with their four “core principles” reports on the state of our financial markets and suggested reforms, [2] produced the most thoughtful, citizen-focused pieces of work I’ve seen in the financial sector. The reports thoroughly frame the issues, narrow the debate and provide a pathway forward. Craig, I cannot thank you enough for your work on behalf of our Main Street investors.

Today, Brett and I are not going to speak in sequence. We’re going to do what we do within the walls of the Commission—we’re going to have a dialogue. I’ll introduce the topics and issues—there are four: (1) a bit of history, including the equity market structure initiatives the Commission completed last year, and then the subjects of the staff’s recent roundtables, [3] (2) thinly-traded securities, (3) combating retail fraud, and (4) market access and market data—and then Brett, with an interruption or two from me, will provide the details.

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The Labor Market for Directors and Externalities in Corporate Governance: Evidence from the International Labor Market

Posted by Ugur Lel (University of Georgia) and Darius P. Miller (Southern Methodist University), on
Saturday, March 9, 2019
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Ugur Lel is Associate Professor and Nalley Distinguished Chair in Finance at Darius Miller is Caruth Chair of Financial Management at the Southern Methodist University Cox School of Business. This post is based on their recent article, forthcoming in the Journal of Accounting and Economics.

In our recent article titled The Labor Market for Directors and Externalities in Corporate Governance: Evidence from the International Labor Market, forthcoming in the Journal of Accounting and Economics, we examine how the potentially opposing forces created by country level aggregate governance impacts the ability of the labor market for outside directors to align the interest of managers and shareholders.

The board of directors is one of the pillars of modern corporations. Corporate boards are delegated by shareholders to protect their interests worldwide by monitoring and advising managers. While theory recognizes that the incentives and ability of directors to safeguard shareholders’ interests can vary significantly across countries (see Levit and Malenko (2016)), there is no cross-country evidence on the directorial labor market’s ability to align the interests of shareholders and managers.

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