Monthly Archives: August 2022

Corporate Political Spending and State Tax Policy: Evidence from Citizens United

Cailin Slattery is Assistant Professor of Business and Public Policy at University of California Berkeley Haas School of Business; Alisa Tazhitdinova is Assistant Professor of Economics at the University of California, Santa Barbara; and Sarah Robinson is a PhD candidate in economics at the University of California, Santa Barbara. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita; and The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss.

In January 2010, decades of legal precedent were overturned when the Supreme Court, in Citizens United v. FEC, decided that the government cannot restrict independent political expenditures by corporations, labor unions, and other associations. Critics decried the devastating impacts of independent spending by corporations. For example, the editorial board of the New York Times wrote that it “paved the way for corporations to use their vast treasuries to overwhelm elections and intimidate elected officials into doing their bidding.”

The Citizens United ruling was in fact followed by a substantial increase in independent spending.  Spencer and Wood (2014) find that although spending increased in all states post-Citizens, the increase in independent expenditures was twice as large in states that restricted corporate spending before the ruling. Similarly, Petrova, Simonov and Snyder (2019) find that Citizens United led to significant increases in political advertising. The question remains whether this increase in political spending had a meaningful effect on government policies.


SEC Climate Disclosure Comments Reveal Diversity of Views

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS Corporate Solutions publication by Paul Hodgson, Senior Editor at ISS Corporate Solutions, Noam Cherki, Regulatory Affairs Intern, and Karina Karakulova, Director of Regulatory Affairs and Public Policy, at Institutional Shareholder Services.

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? (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.

The Securities and Exchange Commission in March published its long-awaited proposed rule requiring U.S.-listed companies and foreign private issuers to provide more in-depth and standardized climate-related information in their registration statements and annual reports. The regulator has received about 11,000 comments on the proposal—far more than usual—and continues to get submissions nearly a month after the close of the official review period. Our analysis shows that while there was overwhelming investor support for climate disclosure regulation in general, comments diverge significantly on the recommended regulatory path ahead.

Comment Perspectives

ISS Corporate Solutions examined a representative range of comments from investors (both asset owners and managers) and investor groups, such as CalSTRS, BlackRock, The Council of Institutional Investors; non-profits and consumer protection groups, such as As You Sow and Ceres; former SEC chairs and commissioners; legal and academic scholars; corporations, such as Occidental Petroleum, Hewlett-Packard and United Airlines; banks, including Norges Bank and Citigroup; associations, such as the Society for Corporate Governance and the Business Roundtable; and auditing firms such as EY. Comments from different parties did not always fall along corporates vs. investors, though some did. The Business Roundtable and the Chamber of Commerce described the proposed disclosures as completely unworkable.


California State Court Applies Discovery Stay in Securities Act Claim

Susan E. Engel and Matthew Rawlinson are partners and Peter Trombly is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Engle, Mr. Rawlinson, Mr. Trombly, Samir Deger-Sen, and Morgan E. Whitworth.

A recent decision, if widely adopted, could spare companies from unnecessary discovery costs in claims that may not survive a threshold pleadings challenge.

Key Points:

  • State courts across the country have reached conflicting conclusions on whether the Private Securities Litigation Reform Act’s (PSLRA) automatic stay of discovery pending a ruling on a complaint’s legal sufficiency applies to cases filed in state court.
  • Breaking from the majority approach among California courts, a San Mateo County Superior Court conducted a thorough statutory interpretation analysis and concluded that the PSLRA requires a stay of discovery in state court.
  • If state courts were to reach consensus on this conclusion or if the US Supreme Court were to adopt it securities plaintiffs would possess less leverage to coerce settlements by filing in state court and forcing companies to engage in early discovery.

On July 25, 2022, a California state court held that the PSLRA imposes an automatic stay of discovery during the pendency of a motion to dismiss or its equivalent in state-court actions arising under the Securities Act of 1933. [1] Recognizing that this question has divided state courts across the country, the court urged the US Supreme Court to provide the “last word” on this important and recurring issue “as soon as possible.” [2]


The Securities Act of 1933 imposes disclosure obligations on issuers seeking to sell securities to the public. In general, Section 5 of the Securities Act requires issuers to register securities offerings with the Securities and Exchange Commission. [3] Section 12(a)(1) imposes liability on any person who sells unregistered securities, [4] and “control persons” of a seller of unregistered securities may be held liable pursuant to Section 15. [5] Private plaintiffs may bring certain Securities Act claims including claims under Sections 12(a)(1) and 15in either federal or state court. [6]


Board Leadership, Meetings, and Committees

Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post is based on a Conference Board memorandum by Merel Spierings, in partnership with ESG data analytics firm ESGAUGE and in collaboration with Debevoise & Plimpton, the KPMG Board Leadership Center (BLC), Russell Reynolds Associates, and the John L. Weinberg Center for Corporate Governance at the University of Delaware.

As boards grapple with a wider array of ESG issues and seek to take the interests of multiple stakeholders into account—all amidst significant economic, social, and geopolitical upheavals—we are seeing not only an evolution in the composition of US corporate boards but also meaningful changes in board leadership structures, board meeting practices, and committee structures.

If “diversity” is a key theme in US board composition as boards become more demographically diverse with a greater focus on functional expertise in areas such as technology, finance, and operations, then “variety” is the corresponding theme in board leadership, meeting practices, and committee structures.

  • We are seeing an increase in the percentage of companies where the board chair is an independent director. This is not being driven by an overriding wave of shareholder sentiment, however, but rather by company-specific circumstances that are leading to different permutations of board leadership structures that unfold over time.
  • While the number of board meetings has fallen from a peak during the first year of the COVID-19 pandemic, the number remains somewhat elevated. Boards are experimenting with different approaches to the timing and format of board and committee meetings and with the use of informal convenings to maintain a high level of communication.
  • The majority of boards at public companies with over $5 billion in annual revenue now typically have four or five committees, rather than the three generally called for by stock exchange listing standards. But with few exceptions, there is little overall consistency in the types of additional committees that boards have established to grapple with their expanding responsibilities.

This post provides insights about board leadership, board meetings, and board committees at S&P 500 and Russell 3000 companies. Our findings are based on data pulled on June 8, 2022 from our live, interactive online dashboard powered by ESGAUGE, as well as a Chatham House Rule discussion with leading in-house corporate governance professionals held in April 2022. Please visit the live dashboard for the most current figures. [1]


The Economics of Corporate Governance

Mathieu Pellerin is Senior Researcher at Dimensional Fund Advisors. This post is based on his recent paper.

Dimensional’s recent paper The Economics of Corporate Governance provides a concise overview of the corporate governance literature. We focus on the governance of for-profit, publicly traded corporations and address two important questions. First, for whom should such corporations be run, shareholders or stakeholders? Second, what is the impact of governance provisions on shareholder value?

We ground our analysis in the agency view of the corporation, which emphasizes the costs and benefits of delegated power. Under the agency view, a key concern is that directors and executives might use their discretion to advance their own interests at the expense of the constituencies they serve. Corporate governance is thus faced with a fundamental tension between the need to grant directors and executives sufficient discretion to fulfill their duties and the need to establish guardrails to deter possible opportunistic behavior. This tension is central to the two questions we address.

Shareholder Value Maximization vs. Stakeholder Capitalism

Shareholder value maximization (SVM) assumes that shareholders own the corporation and that it should be run for their sole benefit. This doctrine has been the dominant organizing framework for corporate governance since the 1980s (e.g., Berger, 2017). However, criticism of SVM increased in the wake of the global financial crisis of 2008. More recently, mounting concerns regarding the externalities of corporations, such as greenhouse gas emissions, have fueled skepticism of SVM.


The Important Legacy of the Sarbanes Oxley Act

Michael W. Peregrine is partner at McDermott Will & Emery LLP, and Charles W. Elson is Founding Director of the Weinberg Center for Corporate Governance and Woolard Chair in Corporate Governance (ret.) at the University of Delaware.

The recent, twentieth anniversary of the Sarbanes-Oxley Act (“Sarbanes”) offers an important corporate responsibility teaching moment for corporate executives, board members and their accounting and legal advisors. This is especially the case given that so many of them were not in similar positions when the law was enacted on July 30, 2002, and may be unfamiliar with the extraordinary circumstances that led to its enactment.

Sarbanes reflected a bipartisan Congressional effort to respond firmly to widespread accounting scandals and notorious incidents of corporate fraud in 2000-2001. These prompted several economy-shaking bankruptcies that undermined public confidence in corporate financial statements. The ripple effects of these incidents impacted principles of corporate governance, and the manner in which legal and accounting firms interact with their clients.

The scope of the Congressional response became one of the most consequential corporate governance and finance developments in history, the implications of which are felt in C-Suites and boardrooms to this day.

Precipitating Factors

The legislative effort that led to Sarbanes’ enactment was precipitated by a shocking series of bankruptcies and similar financial collapses of major U.S. corporations within an uncomfortably short period of time. The most prominent of these collapses involved the energy trading firm Enron, which for a number of years had been lauded by the financial media for its innovative orientation and its workforce culture. When it filed for Chapter 11 protection in December, 2001 it became the largest bankruptcy in U.S. history at that time. It was soon surpassed in such ignominy by the July 2002 bankruptcy of the telecommunications firm WorldCom.


ISS Provides Guidance on the Universal Proxy Card

Kai Liekefett and Derek Zaba are partners and Leonard Wood is senior managing associate at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Liekefett, Mr. Zaba, Mr. Wood, Jessica Wood and Beth E. Berg. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

On August 23, 2022, Institutional Shareholder Services (ISS), the leading global proxy advisory firm, issued a special situations research note on the new, mandatory “universal proxy card” rules instituted by the U.S. Securities and Exchange Commission.

In its note, ISS declared the new rules the “superior” way for shareholders to exercise their voting franchise and observed that this system will make it “dramatically easier” and “cheap” for activist shareholders to launch proxy fights. ISS also offered perspectives on how the new system could help activists in their campaigns. Public companies should pay close regard to these perspectives in light of the weighty influence of ISS’s proxy voting recommendations on the outcomes of contested director elections. The most notable of ISS’s perspectives are that under the new framework, directors’ individual qualifications may come into greater focus relative to the merits of an overall slate and that a board’s “weakest” members may now become more vulnerable in a proxy contest.

Under the universal proxy card rules, which apply to shareholder meetings after August 31, 2022, the separate proxy cards issued by a company and dissident shareholder during a proxy contest for director elections must include both the company’s and dissident’s respective nominees, such that shareholders will be able to give proxy voting instructions in favor of any combination of properly nominated candidates up to the number of authorized seats for election. Under the outgoing system, shareholders received separate proxy cards from the company and dissident that each included only the respective parties’ different slates, and, as such, shareholders were not able to “mix and match” their voting instructions for any combination of director candidates from both slates. As discussed in a previous Shareholder Activism Update, the new rules have the potential to lead to increased proxy contest threats and less challenging campaigns for activists.

ISS’s key perspectives on the new system, and its role in that system, are as follows:


Board Reforms, Stock Liquidity, and Stock Market Development

Buhui Qiu is Associate Professor of Finance and Director of Doctoral Studies and Thomas Y. To is Lecturer (Assistant Professor) of Finance at the University of Sydney Business School. This post is based on their recent paper, forthcoming in the Review of Corporate Finance Studies.

To develop financial markets, improve market liquidity and attract international capital, governments around the world are encouraged to improve their countries’ corporate governance systems and adopt internationally accepted best practices in corporate governance (e.g., OECD, 2011). However, there is little cross-country evidence in the extant literature on whether and how corporate governance reforms affect stock liquidity and stock market development. Corporate boards are arguably the most important corporate governance mechanism to protect outside shareholders from expropriation by corporate managers. Thus, over the past decades we have observed the introduction of a series of board reforms to improve board monitoring on corporate managers in numerous countries around the world and such reforms are shown to have increased firm value (Fauver, Hung, Li, and Taboada, 2017). In this study, we provide new empirical evidence on the effect of board reforms on stock liquidity and stock market development around the world.

Ex ante, the effects of board reforms on stock liquidity and stock market development are ambiguous. On the one hand, theories suggest that enhancing the strength of internal corporate governance such as board monitoring mitigates managerial incentive in information manipulation and improves corporate disclosures (e.g., Qiu and Slezak, 2019). It is well known that information asymmetry decreases stock liquidity (e.g., Glosten and Milgrom, 1985; Glosten and Harris, 1988); improved information disclosures from a firm decrease the level of information asymmetry on its fundamental value, leading to greater market liquidity to the securities issued by the firm (e.g., Diamond and Verrecchia, 1991; Coller and Yohn, 1997; Affleck-Graves, Callahan, and Chipalkatti, 2002). Thus, board reforms aiming at improving board monitoring should significantly increase stock liquidity. In turn, increased stock liquidity should help facilitate the healthy development of stock markets.


ECB Tilts Toward Climate, but Investors Can Go Further

Vivek Bommi is Head of European Fixed Income and Director of European and Global Credit; Eamonn Buckley is Portfolio Manager of Global and European Credit; and Markus Peters is Senior Investment Strategist of Fixed Income at AllianceBernstein L.P. This post is based on their AllianceBernstein memorandum.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales; Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

The European Central Bank (ECB) is set to tilt its monetary policy strategy towards corporate bond issuers with “better climate performance.” That’s a laudable but challenging goal to implement. While simple decision rules may seem useful, we think investors need a holistic understanding of climate issues to address the causes and effects of climate change. Last month, the ECB announced an official start date of October 2022 for building climate change into its monetary policy operations. The climate policy tilt will include not only the ECB’s corporate bond-buying programs but also the bank’s disclosure policies, risk assessment and collateral framework. Under the plan, the share of assets on the Eurosystem’s balance sheet issued by companies with a better climate performance will be increased compared with that by companies with a poorer climate performance. That sounds straightforward, but there are formidable practical difficulties around this plan.


Statement by Chair Gensler on Final Amendments to the Whistleblower Program

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Today, the Commission voted to adopt amendments to rules governing the SEC’s whistleblower program. I was pleased to support these amendments because they will help whistleblowers when eligible to receive appropriate awards for reporting potential violations of the law to the Commission.

In 2010, Congress under the Dodd-Frank Act directed the SEC to establish a whistleblower program, which to date has greatly aided the Commission’s work to protect investors. In the years since the program was established, the SEC has used whistleblower information to obtain sanctions of over $5 billion from securities law violators, return over $1.3 billion to harmed investors, and award over $1.3 billion to whistleblowers for their service.

Today’s amendments enact two changes to help enhance the whistleblower program.

The first amendment expands the circumstances in which a whistleblower who assisted in a related action can receive an award from the Commission for that related action rather than from the other agency’s whistleblower program.

The second amendment concerns the Commission’s authority to consider and adjust the dollar amount of a potential award. Under today’s amendments, when the Commission considers the size of the would-be award as grounds to change the award amount, it can do so only to increase the award, and not to decrease it. This will give whistleblowers additional comfort knowing that the Commission would not decrease awards based on their size.


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