Monthly Archives: February 2020

Investors’ Expectations from the 2020 Proxy Season

Steve W. Klemash is Americas Leader; Jamie C. Smith is Associate Director; and Rani Doyle is Executive Director, all at the EY Center for Board Matters. This post is based on their EY memorandum.

For the past nine years, we have engaged governance specialists from a broad range of institutional investors to find out what they are focused on for the upcoming proxy season. This year they told us they want companies to more clearly explain how they are creating long-term value and competitive advantage.

They are particularly interested in how companies are addressing environmental, social and governance (ESG) matters to build resiliency amid continued disruption, accelerating climate risk and other trends shaping the global business landscape. They also want to better understand how boards are evolving their practices to strengthen board composition, enhance perspective and better navigate rapidly evolving risks. And they want to know how executive pay is enabling effective development and execution of strategy and driving long‑term value.

These are some of the key themes of our conversations with governance specialists from more than 60 institutional investors representing over US$35 trillion in assets under management, including asset managers (62% of all participants), public funds (18%), labor funds (15%), and faith‑based investors (3%), as well as investor consultants and associations (2%).

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The Persistent Effect of Initial Success: Evidence from Venture Capital

Ramana Nanda is the Sarofim-Rock Professor of Business Administration at Harvard Business School; Sampsa Samila is Assistant Professor of Strategic Management at the IESE Business School; and Olav Sorenson is the Frederick Frank ’54 and Mary C. Tanner Professor of Management and Professor of Sociology at Yale University. This post is based on their article, recently published in the Journal of Financial Economics.

One of the distinctive features of private equity as an asset class has been long-term persistence in the relative performance of private equity partnerships. Kaplan and Schoar (2005) for example, find correlations of nearly 0.5 between the returns of one fund and the next within a given private equity firm. Among venture capital (VC) funds, they report even higher levels of persistence, with correlations approaching 0.7. By contrast, persistence has been almost non-existent among asset managers operating in the public equity markets (Ferson, 2010; Wermers, 2011).

The most common interpretation of this persistence has been that private equity fund managers differ in their quality. Some managers, for example, may have a stronger ability to distinguish better investments from worse ones. Or, they may differ in the degrees to which they add value post-investment—for instance, by providing strategic advice to their portfolio companies or by helping them to recruit able executives.

But differences in performance could also stem from better access to deal flow. To gain greater insight into the sources of persistence, we shift the unit of analysis to the individual investment. Specifically, in our paper we examine how the performance of VC firms’ initial investments—in terms of having successful exits, either through IPOs or trade sales—are related to success that VC firms have with their subsequent investments.

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Want to Join a Corporate Board? Here’s How

Susan S. Muck is a partner at Fenwick & West LLP. This post is based on her Fenwick memorandum.

As scrutiny of public company leadership increases, corporations are feeling the pressure to get out ahead of criticism by examining and adjusting the makeup of their boards. This makes 2020 a great time for business leaders interested in joining corporate boards—including professionals from nontraditional backgrounds and underrepresented groups—to make the jump into one of these high-profile roles.

In the past, company boards recruited nearly exclusively from the ranks of current or retired CEOs, CFOs or existing board members. Now, several trends are converging to make board membership accessible to a wider range of candidates than ever, increasing the chances for business leaders who haven’t served in the C-suite.

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Carving Out IPO Protections

Nicki Locker is a partner and Laurie Smilan is Senior Of Counsel at Wilson Sonsini Goodrich & Rosati. This post is based on their Wilson Sonsini memorandum.

Thanks to a 2018 decision by the U.S. Supreme Court, the risk of IPO-related securities litigation has never been higher with class actions often brought by plaintiffs in both federal and state courts. With Congress not likely to act, alternatives are discussed which could eliminate liability under the Securities Act of 1933 for a company going public, and provide issuers, directors, officers, and underwriters with the opportunity to protect themselves from expensive and complex multi-front litigation.

The risk that newly public companies and their officers and directors will be sued in securities class actions has never been higher. And the cost of Directors & Officers liability insurance for companies going public has skyrocketed right alongside. One of the principal drivers of this trend is a 2018 decision by United States Supreme Court which opened the floodgates for IPO-related securities lawsuits in state court, which plaintiffs’ lawyers view as much more plaintiff friendly than federal court.

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U.S. Investors’ Understanding of Workplace Policies and Practices and the Need to Change Them: Progress and Future Efforts

Larry W. Beeferman is a Fellow at the Labor and Worklife Program at Harvard Law School. This post is based on his recent paper.

Under the rubric of “ESG” factors and notions such as “responsible,” “socially responsible,” “sustainable,” and “long-term” investment (and more recently, “impact” investment) increasing attention has been given to corporate conduct as it bears not only on the interests and concerns of investors but also of others whose lives and livelihoods—now and across future generations—are bound up with it. For some time the primary focus was on “G” (governance) issues though “E” (environmental) ones have gained greater prominence. Relatively speaking, little notice has been taken of “S” (social) issues, among them, workplace-related (including human rights) matters.

Change has been very slow though the pace has picked up recently. Among the highlights (in the United States) were the petition filed with the Securities and Exchange Commission in 2017 by the Human Capital Management Coalition pressing for regulations requiring corporate disclosure with respect to “human capital” and the inclusion by the SEC, in 2019, of provisions relating to it in the agency’s broader, pending revision of S-K regulations. Such progress reflects hard, persistent work by numerous actors—certain investors and others who spurred or supported them—who have sought to advance frameworks and/or standards for disclosure.

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The Top 100 U.S. Class Action Settlements of All Time

Jeffrey Lubitz is Executive Director and Mark Lloyd Flores is Vice President at ISS Securities Class Action Services. This post is based on their ISS memorandum.

Executive Summary

During 2019, ISS Securities Class Action Services (ISS SCAS) recorded 101 approved monetary settlements filed in the United States (U.S.) valued at $3.17 billion, that are available for distribution to parties in each settlement. Only two settlements were large enough to qualify for the Top 100 list:

  • Cobalt International Energy—$389.6 million
  • Alibaba Group Holding—$250 million

The 2019 totals are a significant decrease compared with 2018 when U.S. securities class actions totaled $5.84 billion from 126 approved settlements. One action, the $3 billion Petrobas settlement, accounts for much of the disparity between the two years.

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Why Ownership Concentration Matters

Alissa Kole Amico is the Managing Director of GOVERN. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the forum here); The Specter of the Giant Three (discussed on the Forum here), both by Lucian Bebchuk and Scott Hirst; and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

If the global economy was a chess game, few figures would be left standing at the center of the board, while others would be relegated to the role of by-standers, observing an increasing concentration of power in the hands of an ever-dwindling number of global players. Now let us imagine that the figures left standing are corporate entities, at the helm of which sit a shrinking number of ultimate owners. This analogy fundamentally characterizes the global economy today, featuring a growing concentration of corporate ownership.

In the 1990s, we watched in awe the rise of the multinational corporation, an entity which operates cross-border and is able to rapidly crush local competition in smaller markets. With the advent of the internet economy a decade later, the power of many of these companies was further amplified by online distribution which also gave birth of behemoths the likes of Amazon, Google and Airbnb. These new corporate models have solidified corporate concentration and even monopolization of specific sectors, prompting recent calls for Facebook to be broken up.

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Going the Distance

Ron Harris is a Professor of Legal History at the Buchmann Faculty of Law at Tel-Aviv University. This post is based on his recent book, Going the Distance (Princeton University Press).

In my recently published book Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400–1700 (published by Princeton University Press as part of its The Princeton Economic History of the Western World)  I explains why the business corporation first developed in the context of long-distance Eurasian trade, why around the year 1600, why only in England and the Dutch Republic. I also assert that four of the major attributes of the modern business corporation, joint-stock equity finance, lock-in of investment, transferability of interest and protection from expropriation by rulers, were designed in this formative period. Only two attributes, separate legal personality and collective decision making appeared in the pre- 1600 non-business corporation while limited liability, was formulated in a later period. In order to study the formative period in the history of the business corporation, the 17th century, I expanded my research to earlier centuries and to other regions of Eurasia.

Around the year 1400, long-distance oceanic and overland trade along the Eurasian landmass was still mostly conducted over short trajectories. Porcelain, making its way from China to the Middle East or Europe, changed hands many times in various ports in the South China Sea, the Indian Ocean, and the Arabian Sea and its gulfs. Silk and spices were exchanged between merchants in oases along the overland Silk Route. Merchants from several major regions of Eurasia—Chinese, Indian, Persian, Arab—and from a number of ethnic groups, such as Jews and Armenians, were major players in this high-value trade in tropical goods. Europeans were marginal to this commerce.

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Proposed New Tier for Nasdaq Thinly Traded Securities

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

It’s well recognized that the equity markets work pretty well for companies that trade in high volumes, but companies with low trading volumes? Not so much. Thinly traded securities often face liquidity challenges, including wider spreads, higher transaction costs, fewer market makers and potential difficulties for investors that seek to unwind their positions. These issues can discourage small- and medium-sized enterprises from accessing the public markets, a problem that the SEC has been anxious to address. To find potential solutions for these problems, in October 2019, the SEC solicited proposals for changes in equity market structure designed to improve the secondary trading markets for thinly traded securities. Nasdaq has just announced that it has submitted to the SEC an application for exemptive relief that would facilitate its proposal “to establish a tier nestled [sounds very cozy!] within the U.S. public equity markets that is better tailored and far more hospitable to thinly-traded securities than is the all-purpose, undifferentiated market environment in which they suffer today.”

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London’s Premium Segment and High-Growth Companies: Return of the Dual-Class Structure

Sam Bagot and Sebastian R. Sperber are partners and Chris Gollop is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on his Cleary Gottlieb memorandum. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here); The Perils of Small-Minority Controllers (discussed on the Forum here); Keynote Presentation on The Lifecycle Theory of Dual-Class Structures; and The Perils of Dell’s Low-Voting Stock (discussed on the Forum here), all by Lucian Bebchuk and Kobi Kastiel.

The Premium Segment of the London Stock Exchange (LSE) is London’s highest standard listing regime: companies listed on the Premium Segment must comply with stringent eligibility criteria and continuing obligations.

However, in recent years there has been a material reduction in the number of companies seeking admission to the Premium Segment. In addition, a number of market participants believe that high-growth tech companies are materially under-represented on the Premium Segment.

In an article published in late 2019, [1] the Financial Times indicated that, against this backdrop, the UK Government had recently consulted with the investment industry over potential changes to the UK Listing Rules (Listing Rules) designed to encourage high-growth companies to list on the Premium Segment. Most notably, this article indicated that the UK Government was considering the introduction of a regime to cater for the listing on the Premium Segment of companies with dual-class structures.

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