Monthly Archives: January 2024

Driving Board Excellence

Posted by Matteo Tonello, The Conference Board, on
Wednesday, January 31, 2024
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Merel Spierings is Senior Researcher at The Conference Board ESG Center in New York. This post relates to a report authored by Ms. Spierings and based on disclosure data from Corporate Board Practices in the Russell 3000, S&P 500, and S&P MidCap 400: Live Dashboard, a live online dashboard published by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and The John L. Weinberg Center for Corporate Governance at the University of Delaware.

This report completes a series on Corporate Board Practices in the Russell 3000 and S&P 500 and discusses areas of board governance that often receive less investor and public attention than topics such as board diversity but are nonetheless critical for board excellence. They include director orientation and continuing education, performance evaluations, committee member rotation, and overboarding. READ MORE »

Silicon Valley Bank Demise: Causes and the Path Forward

Posted by Sanjai Bhagat and Henry Laurion, University of Colorado Boulder, on
Wednesday, January 31, 2024
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Sanjai Bhagat is Professor of Finance, and Henry Laurion is Assistant Professor of Accounting at the University of Colorado Boulder Leeds School of Business. This post is based on their SSRN working paper. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); How to Fix Bankers’ Pay by Lucian Bebchuk (discussed on the Forum here); and The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here).

The recent demise of Silicon Valley Bank, First Republic Bank, and Signature Bank are three of the four largest bank failures in U.S. history. These bank failures have sent shock waves not only through the bank regulators and depositors, but also through the venture capital industry, commercial real estate lenders, and crypto investors. The media and researchers have focused on the role of duration mismatch between the assets and liabilities of these banks. In this paper we focus on the problems with bank fundamentals, namely, bank governance and bank capital structure, that allowed, or even encouraged, bank managers to ignore the growing mismatch between the assets and liabilities of their banks.

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M&A Predictions and Guidance for 2024

Posted by Ethan Klingsberg, Freshfields Bruckhaus Deringer LLP, on
Wednesday, January 31, 2024
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Ethan Klingsberg is a Partner at Freshfields Bruckhaus Deringer LLP. This post is based on his Freshfields memorandum. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

1. Cross-Border M&A – The era of migration transactions comes into full bloom.

Many companies listed outside the US would trade today at higher multiples to earnings and other applicable metrics if they were listed in the US and, even more so, if they could make it into the S&P 500 (which does not require that issuers be organized under the laws of a US state).

The result will be a continuation of these trends:

  • Exchange hopping. Issuers listed outside the US will increasingly obtain a second listing in the US, and then migrate over to having the US listing as their primary listing and thereby take advantage of index eligibility that comes with this migration.
  • Using excess cash to arbitrage multiples. US-listed companies will use their excess cash to buy targets outside the US. When those earnings become housed under a US-listed company, they will trade at the US-listed company’s higher multiple. Even when paying a premium to the non-US listed entity’s trading price, there will be room for a win/win for the US buyer and non-US target holders, especially if there are some synergies. Buying outside the US will mean digesting terms and takeover rules that are more target-favorable than in the US, as well as often having to undertake more acrobatics than the US M&A regimes require for acquiring 100% ownership. The trading multiple arbitrage will make the effort worth it.
  • Stock combinations to back into a US listing. Stock for stock combinations (including mergers of equals) between US-listed and non-US listed companies will provide an efficient way to reap synergies and get that non-US company listed in the US with the multiple bump and index inclusion advantages.

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Compensation Season 2024

Posted by Adam Shapiro, David Kahan and Michael Schobel, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 30, 2024
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Adam J. Shapiro, David E. Kahan, and Michael J. Schobel are Partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Shapiro, Mr. Kahan, Mr. Schobel, Jeannemarie O’Brien, and Erica E. Aho.

In contrast to the volatility that vexed the economy in 2022, markets rose in 2023 as inflation fell and the labor market remained strong.  Entering 2024, ongoing international instability, rapidly changing technology and the United States presidential campaign are certain to impact the corporate landscape.  Those companies with strong leadership will be best positioned to face the challenges that arise in the coming year.  We identify below some of the fundamental themes that may shape company compensation decisions in the year ahead.

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Accounting Information and Risk Shifting with Asymmetrically Informed Creditors

Posted by Tim Baldenius (Columbia University), Mingcherng Deng (City University of New York), and Jing Li (Hong Kong University), on
Tuesday, January 30, 2024
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Tim Baldenius is the Paul M. Montrone Professor of Private Enterprise at Columbia Business School; Mingcherng Deng is an Associate Professor of Accountancy at Baruch College’s Zicklin School of Business within the City University of New York; and Jing Li is an Associate Professor at Hong Kong University Business School. This post is based on their recent article forthcoming in the Journal of Accounting and Economics.

Should financial reporting regulations be procyclical or countercyclical, with greater scrutiny applied during economic downturns or boom periods? While this question has received much attention in the aftermath of the recent financial crises, often directed at the issue of how particular accounting choices (e.g., fair value accounting) affect equity markets, it remains largely unexplored in debt markets. In a forthcoming article in the Journal of Accounting and Economics, we study the consequences of accounting quality for debt contracting when banks compete to extend loans. Specifically, we ask how the availability of information, public or private, about the economic condition of a potential borrower affects the cost of debt, the borrowers’ incentive to take on risky projects, and the stability of lending relationships over time.

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ESG Insights: 10 Things That Should Be Top of Mind in 2024

Posted by Paul A. Davies, Sarah E. Fortt, and Betty M. Huber, Latham & Watkins LLP, on
Tuesday, January 30, 2024
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Paul A. Davies, Sarah E. Fortt, and Betty M. Huber are partners and Global Co-Chairs of Latham & Watkins’ Environmental, Social, and Governance practice. This post is based on a Latham memorandum by Mr. Davies, Ms. Fortt, Ms. Huber, Mr. Green, Ms. Grewal and Mr. Pierce. 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; How Twitter Pushed Stakeholders Under The Bus (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo; 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 A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

In some ways, 2023 was a challenging year for ESG. This topic can invoke strong and diverse opinions, and debates regarding what ESG should or should not cover, or indeed, whether or not “ESG” itself is consistent with long-term investor interests and the board’s fiduciary duties, proliferated. However, after cutting through these debates and focusing on the varying degrees of importance enterprises place on ESG matters, we see that in 2023, business leaders continued to focus on how certain issues impact their bottom line as well as their corporate reputation, risk exposure and management, and corporate value.

Despite the current challenging environment, regulators have taken extensive steps to embed ESG into the global regulatory landscape. For example, in 2023, ESG-related regulatory trends continued to advance in multiple jurisdictions. At the same time, we also saw increased fragmentation in the US, particularly with respect to issues concerning ESG investment considerations and diversity. Litigation trends also continued, as did the increased awareness of value chain vulnerabilities and risks, leading to companies making strategic decisions associated with corporate opportunities and risk management. At the same time, more traditional questions regarding board composition and investor activism continued to be informed by evolving ESG perspectives.

We anticipate that all of these trends will continue. In this context, the fifth annual installment of Latham’s ESG Top 10 Insights highlights the developments and trends we see as likely to define ESG in 2024.

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Annual Review of Shareholder Activism 2023

Posted by Mary Ann Deignan, Rich Thomas, and Kathryn Night, Lazard, on
Monday, January 29, 2024
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Mary Ann Deignan is Head of Capital Markets Advisory, and Rich Thomas and Kathryn Night are Managing Directors in the Capital Markets Advisory group at Lazard. This post is based on a Lazard memorandum by Ms. Deignan, Mr. Thomas, Ms. Night, Christopher Couvelier, Antonin Deslandes, and Leah Friedman. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon P. Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon P. Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine.

Lazard’s 2023 review of shareholder activism highlights key trends and data in shareholder activism activity throughout the year. New campaign activity in 2023 represented a 7% increase year-over-year and an all-time record for activity in Europe and APAC.

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Corporate Purpose Beyond Borders: A Key to Saving Our Planet or Colonialism Repackaged?

Posted by Roza Nurgozhayeva (Nazarbayev University), and Dan W. Puchniak (Singapore Management University), on
Monday, January 29, 2024
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Roza Nurgozhayeva is an Assistant Professor of Law at Nazarbayev University, and Dan W. Puchniak is a Professor of Law at Yong Pung How School of Law, Singapore Management University and an ECGI Research Member. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Competing Views on the Economic Structure of Corporate Law (discussed on the Forum here) by Lucian A. Bebchuk; Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

The “corporate purpose” debate has captured the attention of academics, lawyers, policymakers, and entrepreneurs around the world. Leading corporate governance scholars see it as one of the “hottest public policy issues” of our time. Governments have embraced legislation to make corporations more purposeful and financial titans have pledged over 100 trillion dollars under their management to foster a broader conception of corporate purpose globally. The realization that climate change is likely the issue of the century and that any chance of successfully addressing it will require a change in the way corporations are governed, seems to justify the attention that the corporate purpose debate is receiving. And yet, the corporate purpose debate, while extremely important, has largely been built on an understanding of corporate law and governance that is local – jurisdiction bound – while the issue of climate change is global; pollution does not respect jurisdictional borders.

This myopic, jurisdictionally bound, conception of corporate purpose forms the logical foundation for Milton Friedman’s (in)famous 1970s New York Times article “The Social Responsibility of Business Is to Increase Its Profits”. In Friedman’s jurisdictionally bound world, local elections and each country’s democratic process are the linchpins holding together his theory that policy decisions related to social responsibility should be left to governments – not the management of companies – justifying his core argument that the focus of companies should be maximizing shareholder value.  The idea that externalities, such as pollution, may cross jurisdictional borders and that, in turn, those impacted by extraterritorial externalities would not be part of the democratic process, was not contemplated in Friedman’s seminal article – a fact that those who both love and loath Friedman’s article have almost entirely overlooked.

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2023 Silicon Valley 150: Corporate Governance Report

Posted by Richard Blake, Wilson Sonsini Goodrich & Rosati, on
Monday, January 29, 2024
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Richard Blake is a Partner at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Blake, Lillian Jenks, Courtney Mathes, and Barbara Novak.

Our 2023 Silicon Valley 150 Corporate Governance Report reviews the corporate governance practices and disclosures of the Valley’s largest public companies. This report uses the Lonergan SV150, which ranks the top 150 public companies with headquarters in Silicon Valley by annual sales. We noted the following key conclusions from our survey of SV150 corporate governance:

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Books and Records Demands 2023 Recap

Posted by Lauren Rosenello, Claire Atwood and Marius Sander, Skadden, Arps, Slate, Meagher & Flom LLP, on
Sunday, January 28, 2024
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Lauren Rosenello is Counsel, and Claire Atwood and Marius Sander are Associates at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

As discussed in prior articles, stockholder plaintiffs have increasingly sought to obtain companies’ books and records under 8 Del. C. § 220 (Section 220) and the Delaware Limited Liability Company Act’s analogous provision, Section 18-305(a), which has led the Court of Chancery to face a record number of books and records actions. In response, over the past year, Chancellor Kathaleen St. J. McCormick has begun assigning books and records actions to magistrates in Chancery in an attempt to reduce the court’s ballooning docket.

While magistrates are now also contributing to books and records case law, existing trends for books and records actions appear, at the moment, to remain roughly the same. The court has reiterated that a stockholder’s burden to establish a proper purpose for inspection is low but not inconsequential. Moreover, a stockholder can only obtain those documents that are necessary and essential to the stockholder’s purpose, and formal board-level materials are typically the starting point and ending point for inspection.

The court also continues to shift fees when defendant companies engage in extreme and vexatious litigation conduct. Finally, this past year saw an order from the Delaware Supreme Court that clarified the standard for the confidential treatment of documents provided in response to a books and records demand.

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