Daily Archives: Thursday, December 23, 2021

Taking Board Governance from Good to Great

Posted by Tim Ryan and Maria Castañón Moats, PricewaterhouseCoopers LLP, on
Thursday, December 23, 2021
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Tim Ryan is Senior Partner and Chairman and Maria Castañón Moats Governance Insights Center Leader at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. 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).

Strategy: don’t just approve it. Measure it, check it, change it.

It’s management’s job, of course, to set company strategy. But board oversight is absolutely critical, and to really get it right, many boards could be even more involved. Directors see this, and many told me so in our conversations. Specifically, boards could spend more time analyzing strategic options that were considered and rejected—not just the path that was taken. They could look to competitive intelligence and widen the aperture beyond the short- and the medium term to focus on the long-term strategy.

Also important: monitoring whether the strategy is really working. The typical once-a-year discussion just doesn’t cut it anymore. Boards need to be armed with timely metrics that will give early and often indications when strategy isn’t delivering the promised results. And they need to be willing to initiate change where necessary.

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Robinhood’s Threat to Sue SEC Over Broker Dealer Regulation Unlikely to Succeed

Posted by J.W. Verret (George Mason University), on
Thursday, December 23, 2021
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J.W. Verret is Associate Professor at George Mason University Antonin Scalia Law School and Managing Director of Veritas Financial Analytics LLC. This post is based on his recent paper.

This paper considers a rulemaking effort underway at the Securities and Exchange Commission to regulate the conflicts of interest that result when brokers send client orders to venues that pay the broker a fee in exchange for routing to them. These payments for order flow or rebates present a distortive conflict to a broker’s duty of best execution that has troubled the SEC for over 40 years and which the SEC has tried to regulate through multiple reforms. Courts have described the broker’s duties to their client as having a fiduciary character, which has long led some to question whether PFOF and exchange rebates violate that duty. The SEC’s new Chair has indicated he will more forcefully address broker conflicts. He has even suggested that an outright ban on PFOF and exchange rebates is “on the table”. Robinhood, a popular trading app that makes most of its equity trading revenue via payment for order flow, has threatened to challenge the rule in court.

Analysis of this rule, and of the likely outcome in subsequent court challenge, shows that Robinhood is likely to lose. The four top broker recipients of payment for order flow obtained $2.5 billion in PFOF in 2020, thus they have much at stake in this reform. The three dominant stock exchange families (particularly NYSE and NASDAQ) also have a stake in this rule, given that it is likely to prohibit similar broker inducements paid by stock exchanges. Supporters of the current system argue that zero commissions, popular among retail investors, are at risk if PFOF and exchange rebates are banned. While that may be true for some business models, this article notes that it is not true for business models like Fidelity that manage to provide zero commissions without accepting PFOF. This pending rule may well be the most substantial of Chair Gensler’s term and stands to bring more significant reform to the national market system than anything since the 1975 amendments to the Exchange Act that established the national market system. Yet this analysis is of interest not merely to brokers accepting PFOF and to the wholesale brokers and stock exchanges that pay them. This challenge also offers a deeper appreciation of the administrative law environment of SEC rulemaking in the market structure context.

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SEC Resets the Shareholder Proposal Process

Posted by Sanford Lewis, Shareholder Rights Group, on
Thursday, December 23, 2021
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Sanford Lewis is Director of the Shareholder Rights Group. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power and Letting Shareholders Set the Rules, both by Lucian Bebchuk.

On November 3, 2021, the Securities and Exchange Commission (“SEC”) Division of Corporation Finance issued Staff Legal Bulletin 14L (“SLB 14L”). From the perspective of proponents, the bulletin resets the shareholder proposal process to: (a) align with the Commission’s original principles and structure of SEC Rule 14a-8 (the “Rule”), (b) reduce subjectivity arising from determinations made by the Staff of the Division of Corporation Finance (the “Staff”), and (c) bring the process into line with the growing importance to the capital markets of environmental, social & governance (“ESG”) issues.

The need for SLB 14L is clear. A series of Staff interpretations and now-rescinded bulletins had rewritten the ordinary business exclusion to add concepts inconsistent with other exclusions. The interpretations added complexity, cost, and subjectivity to the no-action process. Moreover, by disregarding previous Commission positions and the explicit language in other exclusions in the Rule, the Staff added a high degree of unpredictability to the process.

The adopted rules of the full Commission cannot be overturned by the Staff’s intervening guidance. The new bulletin SLB 14L has appropriately revoked nonconforming administrative guidance and realigned Staff interpretation with that of the Commission [1] and the language of Rule 14a-8. The result is an approach more consistent with investor concerns, current governance practices, societal norms, and systemic risks.

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