Monthly Archives: March 2024

Corporate Culture In A New Era: Views From The C-suite

Posted by Jillian Grennan (UC Berkeley), on
Wednesday, March 13, 2024
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Jillian Grennan is an Associate Adjunct Professor of Finance and Sustainability at the University of California, Berkeley Haas School of Business. This post is based on an article forthcoming in the Journal of Applied Corporate Finance by John Graham, Professor Grennan, Campbell R. Harvey, and Shivaram Rajgopal. Related research from the Program on Corporate Governance includes Learning and the Disappearing Association between Governance and Returns (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Charles C.Y. Wang; and What Matters in Corporate Governance? (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell.

Corporate culture has been likened to an organization’s heartbeat–the less visible, somewhat intangible force that shapes its movements, health, and longevity.  Just as humans need a strong heartbeat to live, culture is often the difference between business success and failure.  However, it is difficult to design a culture that drives great business success.  Part of the challenge is in connecting the intangible attributes of a workforce to tangible outcomes like productivity and profitability.  Another component is aligning employees’ values, expectations, and behaviors to drive growth.  But, perhaps the biggest challenge in today’s business environment is knowing which cultural elements to champion in the moments that matter most for employees, as evidenced by the unprecedented workplace upheaval in recent years.

In our article, “Corporate Culture in a New Era: Views from the C-Suite,” recently published in the Journal of Applied Corporate Finance, we synthesize insights from a decade of interviews and surveys with chief executives and top financial executives.  For instance, drawing on survey data from 1,348 North American executives who represent many of the largest firms in the economy, we found a consensus among executives on the significant contribution of culture to long-term firm value.  This research underscores how culture, often overshadowed by easier-to-calculate financial metrics, is a critical, intangible asset that influences employee motivation, retention, and ethical behavior.  

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SEC Enforcement: 2023 Year in Review

Posted by Harris Fischman, Jessica Carey, and David Kessler, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Wednesday, March 13, 2024

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Harris Fischman and Jessica Carey are Partners, and David Kessler is Counsel at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Fischman, Ms. Carey, Lorin Reisner, Mr. Kessler, Kevin Madden, and Emily Sasso.

During the third year of Chair Gary Gensler’s and Director of Enforcement Gurbir Grewal’s leadership, several key enforcement priorities for the SEC impacted and will likely continue to impact businesses across a range of sectors for years to come. In this year in review, we highlight important takeaways for business leaders and in-house counsel from the Division’s activities in 2023, and what these activities suggest for the Division’s priorities for the year ahead.

Highlights:

  • Aggressive Positions Lead to Increased Penalties: The SEC obtained a near record amount of $4.9 billion in penalties in 2023.[1] As in 2022, these penalties were significantly bolstered by investigative “sweeps,” including enforcement actions against broker dealers relating to the use of “off-channel” electronic communications, such as text messages, that resulted in more than $400 million in penalties.[2] The SEC also obtained admissions from corporate defendants in several of these matters.
  • High-Profile and Novel Cryptocurrency Actions: The SEC brought a total of 46 cryptocurrency-related enforcement actions in 2023; a 53% increase from 2022.[3] There continues to be much litigation around the threshold issue of which digital assets will be considered securities subject to, among other things, the registration requirements of the securities laws. In 2023, the SEC suffered a high-profile loss in the Ripple matter in which a district court judge held that Ripple’s sale of XRP to buyers on digital asset exchanges did not constitute the offer or sale of securities. The SEC also brought a number of high-profile enforcement actions in 2023 whose resolution will turn on that question. Most notably, the SEC charged two prominent cryptocurrency exchanges, Binance and Coinbase, for operating as unregistered exchanges. These and other similar enforcement actions related to cryptocurrency advanced novel enforcement theories that will be litigated in courts across the country in 2024 and beyond.
  • Increase in Climate and ESG Disclosures: The SEC remained active in the ESG space, filing several ESG-related enforcement actions in 2023 that foreshadow areas of focus for 2024 and beyond. The market also continues to await significant ESG rulemaking by the SEC, which is expected to be finalized in April 2024.
  • Trends in Insider Trading, Cybersecurity, SPACs, and Other Critical Areas: There were a number of other notable developments in enforcement and rulemaking activities relating to cyber disclosures, SPACs and insider trading.

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Shareholder Activism Annual Review 2024

Posted by Rebecca Sherratt, Diligent Market Intelligence, on
Tuesday, March 12, 2024
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Rebecca Sherratt is a Publications Editor at Diligent Market Intelligence. 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 Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch.

Executive summary

Key shareholder activism trends to emerge from 2023.

  1. An increasing number of U.S companies are identifying activism as a risk in their corporate disclosures. In 2023, 23.4% of Russell 3000 companies disclosed shareholder activism as a risk in their 10-K reporting, up from 21.4% a year prior.
  2. Activism levels remain high in many markets, with shareholders looking further afield for value creation opportunities. In 2023, 982 companies were subject to activist campaigns globally, a 4% rise compared to a year prior and the highest level since 2019. 2023 played host to a 25.5%, 13.4% and 7.8% increase in the number of companies subject to campaigns in Canada, Asia and the U.S., respectively.
  3. Activists are increasingly focusing on corporate remuneration policies, looking for companies to be prepared to weather the challenges brought on by rising costs and slowing economic growth. In the U.S., 81 companies faced remuneration-related demands last year, a 37.3% increase compared to the 59 seen in 2022 and the highest increase of any demand type. Shareholder proposals concerning pay are also winning increased backing, with investors keen to understand policies governing severance and clawback payments.
  4. In a period of rising costs, some of the most high-profile campaigns were a result of what activists deemed to be costly M&A transactions. 2023 saw a 20.8% increase in the number of U.S.-based companies subjected to oppose M&A demands. 14 (48.3%) of resolved oppose M&A demands were at least partially successful in the U.S., compared to 11 (37.9%) in 2022.
  5. 2023 saw the first increase in the number of activist short campaigns recorded globally for four consecutive years, increasing 14.6% on 2022 levels to 110. Of these, 17 (15.5%) of campaigns were launched at large-cap companies, up from eight (6.5%) and 11 (11.5%) in 2021 and 2022, respectively.

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Harnessing the overconfidence of the crowd: A theory of SPACs

Posted by Snehal Banerjee (UC San Diego) and Martin Szydlowski (University of Minnesota), on
Tuesday, March 12, 2024
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Snehal Banerjee is an Associate Professor at the University of California, San Diego Rady School of Management, and Martin Szydlowski is an Assistant Professor at the University of Minnesota Carlson School of Management. This post is based on their article forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates, IV.

Special Purpose Acquisition Companies (SPACs), a form of blank check company, raise funds in an initial public offering (IPOs) with the aim of merging with a private target and facilitating its public listing. In the IPO, the SPAC sells units, which consist of redeemable shares and derivative securities like warrants or rights. Investors have the option to redeem their shares at the initial issue price before the merger, and they can keep and trade rights and warrants even after redemption.

In 2021, the U.S. witnessed an exceptional boom in SPAC deals, with 613 IPOs raising over $161 billion. This constituted 63% of total IPOs and around 48% of total IPO proceeds. However, despite this surge, SPAC investors face a mixed performance. As Ghang et al. (2023) document, buy-and-hold investors realize negative post-merger returns while those who redeem their shares optimally at the time of the merger realize significant excess returns. Additionally, Klausner and Ohlrogge (2022) show that due to redemptions, for every $10 raised at the IPO, the median SPAC only holds $6.67 in cash for each outstanding share at the time of the merger, leading to significant dilution.

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Sears and (the Limited Scope of) Controlling Stockholder Fiduciary Duties

Posted by Ethan Klingsberg, Meredith Kotler, and Victor Ma, Freshfields Bruckhaus Deringer LLP, on
Tuesday, March 12, 2024
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Ethan Klingsberg and Meredith Kotler are Partners, and Victor Ma is an Associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum and is part of the Delaware Law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani.

The recent post-trial opinion by the Delaware Court of Chancery in In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation [1] puts controlling stockholders on notice that they must be mindful of their fiduciary duties to the Delaware corporations they control not only when they are engaging in transactions between themselves and these corporations, but also when selling and voting shares of these corporations.[2] Before having an alarmist reaction that every decision by a controller on whether or not to dispose of its shares or how to vote its shares may trigger a lawsuit on behalf of the minority stockholders, it is worth drilling down on this idea of fiduciary duties of a controller outside the context of a transaction or arrangement where the controller is receiving a unique or non-ratable benefit that is not available to the minority stockholders.

First, there are no fiduciary duties on the part of a controlling stockholder when the controlling stockholder is refusing to sell its shares or is voting against a change to the status quo.  In contrast to a director, who has a duty to take reasonable actions to pursue the best interests of the corporation at all times, a controlling stockholder has the absolute right to “just say no” to changes to the status quo.[3]  A controlling stockholder never has an affirmative obligation to sell or vote in favor of a change even if the sale or change would be in the best interests of the corporation or the minority stockholders.[4]

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2023 Activism Recap

Posted by Camila Panama and Alexander Dussault, Mayer Brown LLP, on
Monday, March 11, 2024
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Camila Panama is a Partner, and Alexander Dussault is an Associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Panama, Mr. Dussault, William Kucera, Martha McGarry, Andrew Noreuil, and Jodi Simala. 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 Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon 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 (discussed on the Forum here) by Leo E. Strine, Jr.

2023 marks the first full year in which the universal proxy rules have been in effect. As most know by now, a key change brought about by the rules is the required use of the universal proxy card in a contested director election—which enables stockholders to vote for their preferred combination of directors, including by mixing and matching among the company and dissident nominees, regardless of which side solicited their vote. Many practitioners predicted that the implementation of the universal proxy rules would have a substantial impact, resulting in increased US activist activity, decreased spending by dissidents on proxy contests, and larger slates of director nominees, among other changes. However, year-end numbers show that such predictions generally missed the mark—by most metrics, there were few notable year-over-year changes. Despite this, there is one key development that emerged in 2023 that merits attention: companies rejected dissident director nomination notices for non-compliance with advance notice bylaws at record rates. This has caused an increasing number of dissidents to challenge such rejections in court. Below, we recap the 2023 numbers and provide key takeaways in light of court guidance on advance notice bylaw provisions and nomination notice rejections.

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Banking and Antitrust

Posted by Saule Omarova (Cornell University and Yale University) and Graham Steele (U.S. Department of the Treasury), on
Monday, March 11, 2024
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Saule Omarova is Beth and Marc Goldberg Professor of Law at Cornell University and Sidley Austin-Robert D. McLean Visiting Professor of Law at Yale University, and Graham Steele is the Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury. This post is based on their forthcoming article in the Yale Law Journal.

There is a curious tension between antitrust law and U.S. bank regulation, as currently practiced. While banks are not technically exempt from antitrust enforcement, they are generally seen as inhabiting an alternative regulatory universe that is governed by principles and prioritizes substantive goals different from antitrust’s traditional competition-related concerns. This de facto exception came into a sharp relief during the Global Financial Crisis of 2007-09.  To stabilize the financial system, regulators rapidly approved emergency mergers and acquisitions and took other measures that dramatically increased the level of concentration in the U.S. banking sector. The post-crisis effort to ensure the stability of these new behemoths was subsequently truncated by regulatory “tailoring” that relaxed many of the new rules to fit banks’ business needs, ostensibly to preserve their competitiveness.  As the memories of the crisis faded away, the banking sector remained largely untouched by the recent antitrust turn in American politics and academia. The latest banking mini-crisis, triggered by the failures of Silicon Valley Bank (SVB) and Signature Bank in the spring of 2023, brought this dynamic back into public view. This latest episode not only replayed the familiar scenario—emergency takeovers and further growth of large banking conglomerates—but also unleashed public calls to further liberalize federal bank merger policy.

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A Guide for Directors to Political Law Issues in This Election Year

Posted by Charles M. Ricciardelli and Melissa L. Miles, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, March 11, 2024
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Charles M. Ricciardelli is a Partner, and Melissa L. Miles is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Key Points

  • With the 2024 election season underway, corporations may want to support the presidential nominating conventions as well as transition efforts and inaugural activities for incoming federal, state and local administrations.
  • These opportunities may come before boards, so it is critical for directors to understand the rules of the road — for their companies as well as for their own individual involvement and that of executives — because these activities can fall under an array of campaign finance, pay-to-play and government ethics rules.
  • Violations not only risk financial penalties and reputational damage, but government contractors that are subject to pay-to-play rules can be barred from state and local government business for years as a result of providing support to certain officials and other political entities.

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Guide to Becoming a Model Code Company

Posted by Bruce F. Freed, Jeanne Hanna and Karl Sandstrom, Center for Political Accountability, on
Sunday, March 10, 2024
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Bruce F. Freed is President and Co-Founder, Jeanne Hanna is Research Director, and Karl Sandstrom is Strategic Advisor at the Center for Political Accountability. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian A. Bebchuk and Robert J. Jackson, Jr.; Investor Protection and Interest Group Politics (discussed on the Forum here) by Lucian A. Bebchuk and Zvika Neeman; and The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian A. Bebchuk, Robert J. Jackson, Jr., James David Nelson, and Roberto Tallarita.

With corporate political disclosure and accountability accepted as the norm, the next step for companies is to put in place a framework for approaching, governing and assessing their election-related spending. The framework would establish policies for when or whether to spend and a process for evaluating the benefits and risks associated with a decision to use corporate resources to advance a political cause or candidate.

It would also provide companies with the internal controls to assure that the spending comports with its public values and its duties legal and fiduciary. An added benefit it that it provides corporate leadership with the opportunity and time to reflect on the full consequences of its spending and to resist any undue pressure from powerful political figures to contribute.

The framework spells out the full range of factors that management and the board need to consider when they are deciding to expend shareholder money to support candidates for public office. It assures that the same due diligence is brought to the company’s political spending as the company gives to its charitable giving. As recent events have demonstrated election- related spending is fraught with risks, legal and reputational.

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Say on Sustainability Pay: An Underutilized Tone of Shareholder Voice

Posted by Paul Rissman, Rights CoLab, on
Saturday, March 9, 2024
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Paul Rissman is Co-Founder of Rights CoLab. This post is based on his Rights CoLab memorandum. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Paying for Long-Term Performance (discussed on the Forum here) and Pay Without Performance: The Unfulfilled Promise of Executive Compensation both by Lucian A. Bebchuk and Jessie M. Fried.

On January 22nd, 2024, ExxonMobil sued in U.S. District Court two shareholder proponents, Follow This and Arjuna Capital LLC, in order to exclude a co-filed proposal regarding greenhouse gas emissions from the Exxon proxy. In light of Exxon’s outsized legal resources relative to those of the non-profit Follow This and the small socially responsible investor Arjuna (less than $400 million in assets under management as of March 2023), the action was viewed as akin to a SLAPP suit, potentially freezing corporate democracy with regard to shareholder resolutions. The proposal was withdrawn on February 2nd, but Exxon vowed to continue in court. Everyone with an interest in the future of shareholder proposals awaits the development of this case.

On the other side of the world, in November 2023, shareholders of the Australian national airline, Qantas, overwhelmingly rejected the company’s remuneration (Say on Pay) report on the grounds that management had improperly outsourced 1700 ground handler jobs, the “largest sacking found to be illegal” in Australian history, in addition to a litany of other missteps. While the 83% “no” vote was non-binding, under Australian corporate law two consecutive “no” votes of 25% or greater will necessitate that all of the corporation’s directors must stand for re-election. The company’s Chair was chastened: “we hear the message this strong vote sends, particularly in response to broader frustration with past events, and it galvanises our efforts to restore your confidence.”

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