Tag: Decision making


Regulatory Competition and the Market for Corporate Law

Ofer Eldar is a doctoral candidate at the Yale School of Management. This post is based on an article authored by Mr. Eldar and Lorenzo Magnolfi, a doctoral candidate at Yale Economics Department. This post is part of the Delaware law series; links to other posts in the series are available here.

There is a longstanding debate in corporate law and governance over the merit of competition for corporate laws. “Race to the top” scholars point to the fact that Delaware, the state where most public firms are incorporated, has laws that are highly responsive to business and has been a laggard in enacting anti-takeover statutes. Proponents of the “race to the bottom” have shown that firms are more likely to incorporate in their home state when that state has adopted more anti-takeover statutes. More recently, they have highlighted the recent rise of firm incorporations in Nevada, following a 2001 Nevada law, which exempts managers from liability for breaching their fiduciary duties. Finally, skeptics of competition argue that it is impossible for states to compete with Delaware by simply replicating its laws, and that relatively few firms reincorporate from one state to another.

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Executive Optimism, Option Exercise, and Share Retention

Robert Tumarkin is Senior Lecturer of Finance at the University of New South Wales. This post is based on an article authored by Professor Tumarkin and Rik Sen, Assistant Professor of Finance at the Hong Kong University of Science and Technology.

Optimism shows up as a pervasive bias in experimental and real-life settings. In the business world, executive optimism is believed to influence a wide range of corporate decisions and policies. However, determining whether an executive is optimistic is not straightforward. Corporate communications featuring key executives can be heavily rehearsed, with words carefully chosen to hide any biases. Interviews with executives may reveal the biases of journalists more than that of the executives.

In our paper, Stocking Up: Executive Optimism, Option Exercise, and Share Retention, recently featured in the Journal of Financial Economics, we propose a robust empirical measure of executive optimism. This measure, which we call Share retainer, is based on observing an executive’s stock transactions that coincide with option exercise. It is motivated by our examination of the optimal option exercise and portfolio choice problem of an optimistic executive who faces a short-sale constraint on company stock.
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The (Neglected) Value of Board Accountability in Corporate Governance

The following post comes to us from Marc Moore, Director of the Centre for Corporate and Commercial Law at University of Cambridge.

The term “accountability” is virtually ubiquitous within literature and debates on organizational governance, and especially within corporate governance. However, as a social phenomenon it is frequently misunderstood, particularly by corporate lawyers.

To a large extent, this is unsurprising. After all, it is to be expected that complex sociological issues posed by the historically peculiar scale and structure of public companies—such as decisional power, accountability and legitimacy—will be received somewhat uneasily within orthodox corporate law discourse. Indeed, with limited exceptions, Anglo-American corporate law scholarship today remains rooted in the traditional conceptual habitat of private law, with its characteristic focus on the discrete relational transaction. A latent but nonetheless significant consequence of this has been the definitional “fudging” by corporate lawyers of some inherently public-governmental phenomena that are relevant to corporate governance, in an attempt to render them consistent with the logic and language of private law. This is true nowhere more than with respect to the difficult concept of accountability.

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Diversity on Corporate Boards: How Much Difference Does “Difference” Make?

The following post comes to us from Deborah L. Rhode, the Ernest W. McFarland Professor of Law and Director of the Center on the Legal Profession at Stanford University, and Amanda K. Packel, the Deputy Director of the Arthur and Toni Rembe Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.

In recent years, increasing attention has focused on the influence of gender and racial diversity on boards of directors. More than a dozen countries now require some form of quotas to increase women’s representation on boards, and many more have voluntary quotas in corporate governance codes. In the United States, support for diversity has grown in principle, but progress has lagged in practice, and controversy has centered on whether and why diversity matters.

In our article, Diversity on Corporate Boards: How Much Difference Does “Difference” Make?, which was recently published in Delaware Journal of Corporate Law, 39, no. 2, Fall 2014, we evaluate the case for diversity on corporate boards of directors in light of competing research findings. An overview of recent studies reveals that the relationship between diversity and financial performance has not been convincingly established. There is, however, some theoretical and empirical basis for believing that when diversity is well managed, it can improve decision-making and enhance a corporation’s public image by conveying commitments to equal opportunity and inclusion. We believe increasing diversity should be a social priority, but not for the reasons often assumed. The “business case for diversity” is less compelling than other reasons rooted in social justice, equal opportunity, and corporate reputation. Our article explores the rationale for diversity and strategies designed to address it.

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Capital Allocation and Delegation of Decision-Making Authority within Firms

The following post comes to us from John GrahamCampbell Harvey, and Manju Puri, all of the Finance Area at Duke University.

In our paper, Capital Allocation and Delegation of Decision-Making Authority within Firms, forthcoming in the Journal of Financial Economics, we use a unique data set that contains information on more than 1,000 Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) around the world to investigate the degree to which executives delegate financial decisions and the circumstances that drive variation in delegation. Our results can be grouped into four themes.

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Do Long-Term Investors Improve Corporate Decision Making?

The following post comes to us from Jarrad Harford, Professor of Finance at the University of Washington; Ambrus Kecskés of the Schulich School of Business at York University; and Sattar Mansi, Professor of Finance at Virginia Polytechnic Institute & State University.

It is well established that managers of publicly traded firms, left to their own devices, tend to maximize their private benefits of control rather than the value of their shareholders’ stake in the firm. At the same time, imperfectly informed market participants can lead managers to make myopic investment decisions. One of the most important mechanisms that have been proposed to counter this mismanagement problem is longer investor horizons. By spreading both the costs and benefits of ownership over a long period of time, long-term investors can be very effective at monitoring corporate managers.

We explore this subject in our paper entitled Do Long-Term Investors Improve Corporate Decision Making? which was recently made publicly available on SSRN. We ask two questions. First, do long-term investors in publicly traded firms improve corporate behavior? Second, does their influence on managerial decision making improve returns to shareholders of the firm? To answer these questions, we study a wide swath of corporate behaviors.

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Does Mandatory Shareholder Voting Prevent Bad Corporate Acquisitions?

The following post comes to us from Marco Becht, Professor of Corporate Governance at the Université libre de Bruxelles; Andrea Polo of the Department of Economics and Business at the Universitat Pompeu Fabra and Barcelona GSE; and Stefano Rossi of the Department of Finance at Purdue University.

In our paper, Does Mandatory Shareholder Voting Prevent Bad Corporate Acquisitions?, which was recently made publicly available as an ECGI and Rock Center Working Paper on SSRN, we examine how much power shareholders should delegate to the board of directors. In practice, there is broad consensus that fundamental changes to the basic corporate contract or decisions that might have large material consequences for shareholder wealth must be taken via an extraordinary shareholder resolution (Rock, Davies, Kanda and Kraakman 2009). Large corporate acquisitions are a notable exception. In the United Kingdom, deals larger than 25% in relative size are subject to a mandatory shareholder vote; in most of continental Europe there is no vote, while in Delaware voting is largely discretionary.

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Do Conservative Justices Favor Wall Street?

The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

The appointment of Supreme Court justices is a politically-charged process and the “ideology” (or “judicial philosophy”) of the nominees is perceived as playing a potentially relevant role in their future decision-making. It is fairly easy to intuit that ideology somehow enters the analysis with respect to politically divisive issues such as abortion and procreative rights, sexual conduct, freedom of speech, separation of church and state, gun control, procedural protections for the accused in criminal cases, and governmental powers. Many studies have tackled the question of the relevance of the ideology of the justices or appellate judges on these issues, often finding a correlation between policy preferences and decisions.

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Communication and Decision-Making in Corporate Boards

The following post comes to us from Nadya Malenko of the Finance Department at Boston College.

The board of directors is a collective body, whose members have diverse expertise in various aspects of the company’s business. Therefore, communication between directors is critical to successful board functioning. In recent years, regulators, shareholders, and directors themselves have been paying increased attention to decision-making policies that could increase the quality of board discussions. Executive sessions that exclude the management, separation of the CEO and chairman positions, board retreats, and separate committees on specific topics have been put in place to promote more effective communication. As governance experts Carter and Lorsch (2004) emphasize, “If we could offer only one piece of advice, it would be to strive for open communication among board members.”

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The Evolving Direction and Increasing Influence of Shareholder Activism

The following post comes to us from John J. Madden, Of Counsel and member of the Mergers & Acquisitions Group at Shearman & Sterling LLP, and is based on an article that first appeared in Directors & Boards.

When we convened our Corporate Governance Symposium last year (October 2012), we highlighted the increasingly important role shareholders were playing in the corporate decision-making process, commenting as follows:

“Over the course of the past year, we have continued to see shareholders making their voices heard, in some cases rather forcefully and effectively, on a broad range of corporate issues. In many ways, the recent developments in corporate governance reinforce the growing perception that we are, and have been for several years, experiencing a potentially fundamental shift in the balance of authority, or influence, between boards of directors and shareholders in the corporate decision-making process, moving further away from the longstanding board primacy model of corporate governance.”

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