Monthly Archives: October 2021

Banking-Crisis Interventions, 1257-2019

Posted by Andrew Metrick and Paul Schmelzing (Yale), on
Tuesday, October 12, 2021
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Andrew Metrick is the Janet L. Yellen Professor of Finance and Management at the Yale School of Management and the Director of the Yale Program on Financial Stability; and Paul Schmelzing is a Postdoctoral Research Associate at Yale School of Management. This post is based on their recent paper.

Banking crises are pervasive. Even mature economies with stable governments cannot escape them. These crises are costly for economies, for public trust, and for political stability. These social costs motivate government action, but what form should that action take? What kinds of interventions work? How exactly should they be structured and sequenced? To answer these questions we would like to learn from history, and to do this well requires a database of past actions. Despite considerable progress by scholars since the 1990s in building chronologies of banking crises, no comprehensive overview cataloguing and analyzing crisis interventions exists. In a newly released working paper, we present such a comprehensive database for the first time, describe our construction process, and analyze the patterns of crisis interventions across time and space. A dedicated database website (to be updated regularly) contains full documentations, bibliographies, and excel sheets for researchers and the general public.

To construct our database we first compiled a master list of canonical crises from four major crisis-chronology projects: Reinhart and Rogoff (2009), Schularick and Taylor (2012), Laeven and Valencia (2020), and Baron, Verner, and Xiong (2021). The union of these four sources includes 494 canonical crises. Next, for each canonical crisis, we consult the sources cited by the original authors, along with an extensive primary and secondary literature. These two steps yield a list of 1187 specific interventions.

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Mega-Cap and Large-Cap Consumer Companies Vary in Adoption of Governance Practices

Posted by Audra Cohen and Melissa Sawyer, Sullivan & Cromwell LLP, on
Tuesday, October 12, 2021
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Audra Cohen and Melissa Sawyer are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Cohen, Ms. Sawyer, Eric Krautheimer, and Matthew Goodman.

Executive Summary

Within the consumer industry, mega-cap (>$70B market cap) and large-cap ($20B to $45B market cap) companies show varying degrees of conformity in corporate governance practices. Notably, slight differences between mega-cap and large-cap consumer companies exist regarding board composition, committee structure, diversity, shareholder rights, shareholder composition and corporate disclosures. [1]

In regard to board composition, mega-cap consumer companies have less board refreshment, greater recruitment of board members with consumer or retail industry knowledge, and greater likelihood of having separate CEO and Chair positions when compared to large-cap consumer companies. Furthermore, although each consumer company has at least an audit committee, a compensation committee, and a corporate governance committee pursuant to stock exchange rules, mega-cap consumer companies on average have more committees dedicated to discrete oversight areas, such as innovation or technology development, than large-cap companies. Mega-cap companies also tend to make more public disclosures regarding their diversity, equity, and inclusion data, though they have a slightly lower percentage of their boards composed of female directors and have a slightly higher percentage of their boards composed of racially or ethnically diverse directors. Regarding shareholder rights, mega-cap consumer companies are slightly more likely to grant the right to call a special meeting of their shareholders and have lower shareholder ownership thresholds for calling special meetings. They are also more likely to grant shareholders the right to act by written consent. However, mega-cap consumer companies have lower say-on-pay approval rates compared to large-cap companies. Notably, as compared to large-cap consumer companies, mega-cap consumer companies are also less often controlled by their founders’ family members and tend to have more dispersed share ownership. Finally, while both mega-cap and large-cap consumer companies commonly publish disclosures and reports concerning various metrics, including metrics related to sustainability and social responsibility, there are differences in the types of disclosure frameworks used and kinds of information disclosed.

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2022 Proxy and Annual Report Season

Posted by Laura Richman, David Schuette, and Christina Thomas, Mayer Brown LLP, on
Monday, October 11, 2021
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Laura Richman is counsel, and David Schuette and Christina Thomas are partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

Once again, it is time to prepare for the proxy and annual report season. There are many issues to take into consideration when crafting required regulatory disclosures in a manner that conveys effective messaging to the company’s investors. Advance planning, careful drafting and multi-faceted review greatly contribute to a successful proxy and annual report season, culminating in a productive annual shareholders’ meeting.

This post provides an overview of key issues that companies should consider as they get ready for the upcoming 2022 US proxy and annual report season (2022 Proxy Season), including:

  • Virtual Meetings
  • Compensation Issues
  • Shareholder Proposals
  • Environmental, Social and Governance (ESG) Matters
  • Human Capital Management
  • Board Diversity
  • Proxy Voting Advice
  • Related Person Transaction Approvals
  • Dodd-Frank Rulemaking
  • Risk Factors
  • Management’s Discussion and Analysis
  • Holding Foreign Companies Accountable Act Disclosure
  • ITRA Compliance
  • Electronic Signatures on SEC Filings
  • Director and Officer Questionnaires

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Should SPAC Forecasts be Sacked?

Posted by Michael Dambra (SUNY at Buffalo), Omri Even-Tov (University of California at Berkeley), and Kimberlyn George (University of California at Berkeley), on
Monday, October 11, 2021
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Michael Dambra is Associate Professor of Accounting and Law at SUNY Buffalo School of Management; Omri Even-Tov is Assistant Professor of Accounting at the University of California at Berkeley Haas School of Business; and Kimberlyn George is a PhD candidate at the University of California at Berkeley Haas School of Business. This post is based on their recent paper.

Since 2020, the number of initial public offerings (IPOs) by Special Purpose Acquisition Companies (SPACs) has outpaced the number of traditional IPOs. SPACs are blank-check companies that raise capital from investors with the intent of finding a private target to merge with, effectively taking it public through a process known as a de-SPAC merger. For private firms, one of the benefits of going public through a de-SPAC merger rather than a traditional IPO is the ability to provide forward-looking statements. Under the Private Securities Litigation Reform Act of 1995, public companies are provided qualified safe harbor from liability for forward-looking statements, provided they issue appropriate cautionary language. However, given skepticism of the information integrity of private firms, Congress excluded IPOs from the safe harbor. Thus, SPACs provide private firms an alternate route to going public that permits disclosure of forward-looking information without facing an increase in litigation risk.

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Crisis Management in the Era of “No Normal”

Posted by Paul Washington and Lindsay Beltzer, The Conference Board, on
Monday, October 11, 2021
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Paul Washington is Executive Director and Lindsay Beltzer is Program Manager at The Conference Board ESG Center. This post is based on their Conference Board memorandum.

One common definition of a corporate crisis is an unplanned event that directs a significant amount of management’s attention away from its ordinary business. [1] But that assumes an ordinary baseline exists. While people are hoping for a “new normal,” corporations may need to prepare for an era of “no normal,” reflecting the ever-evolving health impact of the COVID-19 pandemic, the associated economic and social disruptions, and the tectonic shifts underway in the role of corporations in addressing environmental and social issues as well as the shift from stockholder to stakeholder capitalism. As one Fortune 100 corporate director said at the most recent The Conference Board ESG Center Summit, “I haven’t seen a confluence of this many intersectional crises in my 30 years on boards.”

This heightened level of uncertainty changes the way boards and CEOs should view, and prepare for, crisis management. During the past year and a half, boards have stepped up to the plate in addressing the pandemic with increased attention to the areas that mattered most, holding special meetings, receiving frequent briefings, and making the physical, emotional, and financial health of employees a top priority. [2] Despite these efforts, a year-end survey of over 550 C-suite executives found that only 30 percent say their board is able to respond well in a crisis.

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Questions to Ask Before Forming a New Board Committee

Posted by Paul DeNicola, PricewaterhouseCoopers LLP, on
Sunday, October 10, 2021
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Paul DeNicola is Principal at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on his PwC memorandum.

It’s clear that corporate boards have a lot on their plate. From climate change to cybercrime, there is no shortage of emerging risks that demand directors’ attention. How can boards best oversee these matters while balancing existing obligations? Could a new committee be the solution?

How you answer that question depends on your own company and board’s unique circumstances. But before making a decision, there are some universal considerations that every board should think over. Creating a committee can signal that directors are taking the issue it will focus on seriously, but it’s not without its costs. Before moving ahead, it’s wise to put all the options on the table.

Expanding needs

Most boards of large, mature companies have four or more standing committees. That’s the case for 71% of S&P 500 companies, according to Spencer Stuart. Audit, compensation, and nominating/governance are ubiquitous. Executive, risk (mandatory for some financial services companies), and finance committees are the most common beyond those three.

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New York Court on the Enforcement of Federal Forum Provision

Posted by Andrew J. Ehrlich, Brad S. Karp, and Audra J. Soloway, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Saturday, October 9, 2021
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Andrew J. Ehrlich is partner, Brad S. Karp is partner and chairman, and Audra J. Soloway at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Ehrlich, Mr. Karp, Ms. Soloway, Susanna M. Buergel, Daniel J. Kramer, and Geoffrey R. Chepiga.

In the wake of the Supreme Court’s holding in Cyan, Inc. v. Beaver County Employees Retirement Fund, which held that state courts have concurrent jurisdiction over claims brought under the Securities Act of 1933 (the “Securities Act”), many corporations began adopting a federal forum provision (“FFP”) in their charters, requiring Securities Act claims to be brought in federal court. Those charter provisions have been upheld in a number of California state courts. In a recent decision, a New York court for the first time reached the same conclusion.

On August 31, 2021, a New York State court dismissed claims brought under the Securities Act because the defendant-issuer’s charter contained an FFP requiring Securities Act claims to be brought in federal court. The decision in Hook v. Casa Systems, Inc. [1] is the first in New York—and the first in any state court outside California—to enforce an FFP, and continues a pattern of FFP enforcement that bodes well for corporations that have adopted FFPs to avoid the risk and cost of duplicative Securities Act litigation in state courts. The decision is also notable because it dismissed the Securities Act claims as to all defendants, including the underwriters of Casa’s IPO who were not parties to the corporate charter containing the FFP.

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Data Governance Tips for Companies Following SEC’s In re App Annie

Posted by David Feder, Tyler Newby and James Koenig, Fenwick & West LLP, on
Saturday, October 9, 2021
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David Feder is counsel, and Tyler Newby and James Koenig are partners at Fenwick & West LLP. This post is based on a Fenwick memorandum by Mr. Feder, Mr. Newby, Mr. Koenig, Michael Dicke, and Marc Greco.

Case Overview

[The Sept. 14, 2021] U.S. Securities and Exchange Commission enforcement cease-and-desist order (Order) In re App Annie Inc., out of the SEC’s San Francisco Regional Office, underscores the importance of taking meaningful steps to implement and abide by written policies on corporate data management and protection. The Order resolved fraud allegations that App Annie, an alternative data provider for the mobile app industry, and its co-founder and former CEO and Chairman Bertrand Schmitt (Schmitt), misused confidential data that App Annie had obtained by misrepresenting its data management and protection practices to its securities trading firm customers. The SEC ordered the company and Schmitt to pay a $10 million and a $300,000 civil fine, respectively, and barred Schmitt from serving as an officer or director of a public company for three years.

De-Identified Data Means De-Identified

Through a service called Connect, App Annie provides app analytics to companies that agree to give App Annie their app store credentials so that App Annie can collect the companies’ confidential (i.e., nonpublic) app performance data. App Annie represented to those companies that it would use the data only in aggregated, anonymized form to generate estimates of their apps’ performance for them.

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SEC Form 10-K Comments Regarding Climate-Related Disclosures

Posted by Brian V. Breheny, Raquel Fox and Jeongu Gim, Skadden, Arps, Slate, Meagher & Flom LLP, on
Friday, October 8, 2021
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Brian V. Breheny and Raquel Fox are partners and Jeongu Gim is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Breheny, Ms. Fox, Mr. Gim, Caroline S. Kim, and Ryan J. Adams. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

As anticipated, the staff in the SEC’s Division of Corporation Finance has begun issuing detailed comments regarding climate-related disclosures. [1] In February 2021, then Acting SEC Chair Allison Herren Lee announced that she directed the staff to “enhance its focus on climate-related disclosure in public company filings.”

To date, the comments have been issued in stand-alone letters referencing the companies’ most recent Form 10-K filings. These letters have addressed a combination, but not necessarily all, of the following topics that ask companies to:

  • Disclose considerations the company has given to providing the same type of climate-related disclosure in SEC filings as corporate sustainability reports.
  • Identify and quantify any material past and/or future capital expenditures for climate-related initiatives.
  • To the extent material, quantify or discuss the significant physical effects of climate change on the company’s property or operations.
  • To the extent material, disclose any weather-related impacts on the cost or availability of insurance.
  • Identify or quantify any material compliance costs related to climate change, including compliance costs associated with relevant environmental regulations.
  • Disclose any material litigation risks related to climate change and the potential impact to the company.
  • Disclose the material effects of transition risks related to climate change that may affect the company’s business, financial condition and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks or technological changes.
  • To the extent material, disclose the company’s purchase or sale of carbon credits or offsets and any material effects on the company’s business, financial condition and results of operations.

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Corporate Liquidity Provision and Share Repurchase Programs

Posted by Craig M. Lewis and Joshua T. White (Vanderbilt University), on
Friday, October 8, 2021
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Craig M. Lewis is the Madison S. Wigginton Professor of Finance; and Joshua T. White is Assistant Professor of Finance, at Vanderbilt University Owen Graduate School of Management. This post is based on their U.S. Chamber of Commerce report. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, by Jesse Fried (discussed on the Forum here).

Corporations use stock buybacks as a means to unlock value by returning surplus cash to investors. In turn, these investors can deploy the capital to more productive uses. The popularity of stock buyback programs has attracted significant attention from academics, policymakers, and practitioners. Some vocal opponents conjecture that stock buybacks necessarily reduce investment and harm non-investor stakeholders such as employees. Although a large body of academic literature overwhelmingly refutes these claims, such vocal criticisms persist and have led some to calls for limits via taxing stock buybacks or outright bans on open market repurchases.

In this study, we present large sample evidence showing that stock buybacks have a beneficial but often overlooked effect on stock price stabilization. Using a broad sample of over 10,000 U.S.-listed
companies across a 17-year sample period of 2004 to 2020, we present strong evidence that managers strategically utilize share repurchases to increase stock liquidity and reduce volatility. The resulting stabilization in stock prices benefits all investors—including retail investors, who now account of over 20% of trading volume in U.S. equities.

Our analyses of stock buybacks have six key takeaways:

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