Monthly Archives: February 2025

Political Power and Market Power

Posted by Bo Cowgill (Columbia Business School), Andrea Prat (Columbia Business School), and Tommaso M. Valletti (Imperial College Business School), on
Thursday, February 6, 2025
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Bo Cowgill is an Assistant Professor at Columbia Business School, Andrea Prat is the Richard Paul Richman Professor of Business at Columbia Business School, and Tommaso M. Valletti is a Professor of Economics at Imperial College London. This post is based on their recent paper. 

Does market power lead to political power? This longstanding question, raised by Louis Brandeis in 1914, remains strikingly relevant today. As industries become more concentrated, firms not only shape markets but also seek to influence the regulatory and political landscape. In our study, Political Power and Market Power, we examine this connection using detailed data on U.S. mergers, lobbying expenditures, and campaign contributions over two decades. Our findings suggest that corporate consolidation is often followed by a significant and persistent increase in political influence activities, with implications for policy and governance.

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Outlook for M&A and Activism in 2025

Posted by Kyle A. Harris and Kimberly R. Spoerri, Cleary Gottlieb Steen & Hamilton LLP, on
Thursday, February 6, 2025
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Kyle A. Harris and Kimberly R. Spoerri are Partners at Cleary, Gottlieb, Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum.

Many have predicted an M&A boom in 2025 and recent CEO surveys exhibit rising confidence.

Psychology is as important to the merger market as any human endeavor, so one should not discount the power of renewed optimism to be a self-fulfilling prophecy. We expect reality to be more nuanced, however, although 2025 should be a strong year (the usual caveats about fiscal and macro uncertainty aside).

On the corporate side, as in recent years, portfolio reshaping and de-conglomeration will remain a significant driver of transactions, as the market continues to reward simplicity and focus. We also expect elevated interest in cross-border transactions into the U.S. from European corporates looking for greater exposure to the higher-growth U.S. market.

Ultimately, however, private equity will need to be a key driver of the rebound.

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Looking Ahead to 2025

Posted by Krista Parsons and Bob Lamm, Deloitte LLP, on
Wednesday, February 5, 2025
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Krista Parsons is a Managing Director and Bob Lamm is an Independent Senior Advisor at Deloitte LLP. This post is based on their Deloitte memorandum.

Serving on an audit committee in 2025 might be daunting even if the committee could be assured that it would not have to take on any added responsibilities in the new year. After all, even the most basic perennial responsibilities of audit committees, such as overseeing the audit of the financial statements and compliance with financial reporting requirements, are far from routine. However, no such assurance is likely to be forthcoming. In fact, as audit committees contemplate the onset of a new year, the number and complexity of new issues and concomitant responsibilities seem likely to grow.

Moreover, 2025 may be a particularly busy year. With the change in administration, we could see significant changes in regulatory priorities, financial reporting, and corporate governance. Additionally, the increasing use of generative artificial intelligence (GenAI), ongoing cybersecurity threats, and a renewed focus on enterprise risk management at a time of geopolitical uncertainty will likely keep audit committees busy. And, to the extent that companies face unanticipated risks and challenges, it seems almost inevitable that audit committees will be viewed as the default “home” for such developments.

Given this background, audit committees would be well advised to consider a wide variety of continuing and emerging issues that they may need to deal with in 2025, bearing in mind that a complete list of such issues would be far longer than can be addressed in this publication.

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How the EU’s Sustainability Due Diligence Directive Could Reshape Corporate America

Posted by Luca Enriques (Bocconi University), Matteo Gatti (Rutgers Law School), and Roy Shapira (Reichman University (IDC)), on
Wednesday, February 5, 2025
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Luca Enriques is a Professor of Business Law at Bocconi University, Matteo Gatti is a Professor of Law at Rutgers Law School, and Roy Shapira is Professor of Law at  Reichman University (IDC). This post is based on their recent paper.

One of the most important developments in corporate governance is the growing divide between the US and the EU on issues of corporate social responsibility. The starkest example of this divide comes from the new EU Directive on Corporate Sustainability Due Diligence (CS3D). The Directive holds large corporations legally accountable for protecting various human rights and addressing environmental issues, such as forced labor, collective bargaining, biodiversity, and pollution. In fact, companies are required to prevent and remediate these social and environmental harms not just in their own operations, but also in the operations of their subsidiaries and even their suppliers and distributors. Importantly, the CS3D directly applies also to American corporations that generate significant revenues in the European market.

In a new paper, we examine how the Directive will be implemented and enforced in the US.

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White-Collar and Regulatory Enforcement: What Mattered in 2024 and What to Expect in 2025

Posted by David B. Anders, Ralph M. Levene, and Randall W. Jackson, Wachtell, Lipton, Rosen & Katz, on
Wednesday, February 5, 2025
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David B. Anders, Ralph M. Levene, and Randall W. Jackson are Partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Anders, Mr. Levene, Mr. Jackson, Kevin Schwartz, Aline Flodr, and Michael Holt.

As we write this memorandum, President Trump’s second administration is forming in Washington, with new leadership teams being appointed at DOJ, the SEC and across other regulatory and law-enforcement agencies. In 2017, when President Trump first took office, we avoided predicting what the administration’s significant white-collar and regulatory enforcement priorities and policies might be in the absence of noteworthy signals from President Trump or his nominees and in light of the then slow pace of leadership confirmations. Eight years later, however, the lessons from President Trump’s first administration, as well as the track record and statements from his recent nominees and closest advisors, offer some insights into the new administration’s likely enforcement priorities. Given that, we have some thoughts on what to expect from President Trump’s second term:

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Proxy Voting Policy for U.S. Portfolio Companies

Posted by John Galloway, Vanguard, Inc., on
Tuesday, February 4, 2025
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John Galloway is Global Head of Investment Stewardship at Vanguard, Inc. This post is based on a Vanguard Investment Stewardship memorandum.

The information below, organized according to Vanguard Investment Stewardship’s four pillars of corporate governance, is the voting policy adopted by the boards of the Vanguard-advised funds (the “Funds’ Boards”) and describes the general positions of the funds on proxy proposals that may be subject to a shareholder vote at U.S.-domiciled companies. [1]

It is important to note that proposals often require a facts-and-circumstances analysis based on an expansive set of factors. Proposals are voted case by case, under the supervision of the Investment Stewardship Oversight Committee and at the direction of the relevant Fund’s Board. In all cases, proposals are voted as determined in the best interests of each fund consistent with its investment objective.

The following policies are applied over an extended period of time; as such, if a company’s board is not responsive to voting results on certain matters, a fund may withhold support for those and other matters in the future. Regardless of whether proposals are submitted by company management or by other shareholders, they are voted in accordance with these policies and as determined to be in the best interests of each fund, consistent with its investment objective.

The Vanguard-advised funds look for companies to abide by the relevant governance frameworks (e.g., listing standards, governance codes, laws, regulations, etc.) of the market(s) in which they are listed. While the Vanguard-advised funds’ proxy voting policies are informed by these frameworks, final voting decisions may differ from the application of those frameworks due to Investment Stewardship’s independent research, analysis, and engagement. In addition, these policies and their application to specific voting matters are predicated on the Vanguard-advised funds’ acquisition and ownership of securities in the ordinary course of business, without the intent of influencing company strategy or changing the control of the issuer. The Vanguard-advised funds will not nominate directors, solicit or participate in the solicitation of proxies, or submit shareholder proposals at portfolio companies. The application of the policies to specific voting matters will also adhere to any passivity requirements to which the Vanguard-advised funds and/or The Vanguard Group, Inc. and any of its subsidiaries (Vanguard) may be subject.

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Embedded Culture as a Source of Comparative Advantage

Posted by Luigi Guiso (Einaudi Institute), Paola Sapienza (Northwestern University), and Luigi Zingales (University of Chicago), on
Tuesday, February 4, 2025
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Luigi Guiso is the AXA Professor of Household Finance at the Einaudi Institute for Economics and Finance, Paola Sapienza is the Donald C. Clark/HSBC Chair in Consumer Finance Professor at the Kellogg School of Management at Northwestern University, and Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance at The University of Chicago Booth School of Business. This post is based on their recent paper.

The Cultural Economics Revolution

In the second half of the 20th century, economics operated under two fundamental assumptions: that humans were perfectly rational (the rationality assumption) and that their behavior was universally consistent across cultures and contexts (the universality assumption). These hypotheses were challenged by two streams of literature: behavioral economics and cultural economics.

The behavioral revolution made economics more human but not less universal. It maintained the premise that deviations from rationality due to cognitive biases and behavioral patterns were consistent across cultures and contexts. In contrast, cultural economics argues that individuals’ beliefs (priors) and preferences (values) are fundamentally shaped by their personal and communal history, leading to persistent differences in economic behavior across societies.

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Approach to Corporate Enforcement May Become More Business-Friendly

Posted by Anita B. Bandy, Andrea Griswold, and Chad E. Silverman, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, February 4, 2025
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Anita B. Bandy, Andrea Griswold, and Chad E. Silverman are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Bandy, Ms. Griswold, Mr. Silverman, and Peter A. Varlan. 

Key Points

  • The incoming Trump administration is expected to take a more lenient approach to prosecuting entities, reducing emphasis on bringing actions based on what may be viewed as novel theories.
  • Prescriptive policies on self-reporting and cooperation by companies, recently adopted by the DOJ and CFTC, may be loosened.
  • Legislation could clarify jurisdiction over cryptocurrency, possibly assigning that to the CFTC rather than the SEC. Both agencies are expected to adopt more crypto-friendly approaches, absent indicia of fraud.

Anticipating enforcement priorities under a new administration is challenging before the appointment of permanent leadership that will set priorities for policing corporate crime and market misconduct. Lessons from the first Trump term, however, suggest that the incoming administration will bring a more business-friendly environment.

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CEO and C-Suite ESG Priorities for 2025

Posted by Matteo Tonello (The Conference Board), on
Monday, February 3, 2025
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Matteo Tonello is Head of Benchmarking and Analytics at The Conference Board, Inc. This post is based on a Conference Board memorandum by Andrew Jones, Senior Researcher, ESG Center at The Conference Board.

The environmental, social & governance (ESG) landscape will grow more complex in 2025, with businesses facing increasing pressure related to climate risks, regulatory changes, and shifting societal expectations. Based on The Conference Board® C-Suite Outlook 2025: Seizing the Future, a comprehensive survey of global business leaders, this report highlights the key ESG priorities of CEOs and C-Suite executives, with a primary focus on US CEOs and additional insights from European and global perspectives— providing a strategic road map for the year ahead.

Key Insights

  • US CEOs rank climate risk and sustainability as the top-two external ESG factors likely to impact their business in 2025.
  • ESG regulatory complexity is increasing, but US CEOs anticipate less significant business impact from regulations and disclosures compared to their international counterparts.
  • Anti-ESG sentiment ranks fourth among external ESG challenges for US CEOs in 2025 but is absent from the top five for CEOs globally or in Europe, reflecting heightened political polarization and scrutiny in the US.
  • US CEOs prioritize climate resilience and water management as their top environmental concerns for 2025, reflecting perceived risks from extreme weather and water scarcity.
  • Economic opportunity and education lead US and global CEO social priorities, as diversity, equity & inclusion (DEI) backlash shifts some focus away from gender and racial equality.

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Private Equity for Pension Plans? Evaluating Private Equity Performance from an Investor’s Perspective

Posted by Arthur Korteweg (USC), Stavros Panageas (UCLA), and Anand Systla (UCLA), on
Monday, February 3, 2025
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Arthur Korteweg is an Associate Professor of Finance and Business Economics at USC Marshall School of Business, Stavros Panageas is a Professor of Finance at UCLA Anderson School of Management, and Anand Systla is a Ph.D. Student of Finance at UCLA Anderson School of Management. This post is based on their recent paper. 

Introduction

Public pension plans, like many other institutional investors, have steadily increased their allocation to private equity investments over the last two decades. (Figure 1) This trend prompts an important question: do these investments enhance the investment opportunity set by delivering positive risk-adjusted returns, or are they merely high-cost vehicles for taking on risks similar to those available in public markets? In the paper “Private Equity for Pension Plans? Evaluating Private Equity Performance from an Investor’s Perspective” we propose a new methodology to disentangle whether the rates of return associated with private equity (PE) investments represent meaningful outperformance, or just compensation for the risk embedded in these investments. We then apply the methodology to evaluate the returns obtained by public pension plans.

Our findings suggest that PE financed buyout strategies exhibit modest risk-adjusted outperformance, whereas venture capital and real estate funds do not. We also find that public pension plans tend to perform better in their private equity investments than other private equity investors, but this is mostly due to better access to private equity investments rather than selection ability. Finally, we identify a material correlation between a pension plan’s underfunding and the internal rate of return (IRR) of their private-equity investments; however, this correlation is driven by the fact that underfunded pension plans appear to be choosing comparatively riskier private equity investments, which command higher risk premiums.

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