The Boeing 737 Max scandal is one of the most serious corporate crises in U.S. history. While companies like Enron, Arthur Andersen, and Lehman Brothers were replaceable, Boeing is not. Consumers and airlines around the world now view the 737 brand as toxic, a point echoed by a recent tweet by President Trump. Boeing is more than just an industrial company. It represents American industrial and engineering prowess to the world. Boeing’s failure is a national failure and represents a loss in American power and influence. This may be the first time the world followed China’s example on an … Read more
In Europe, when negotiating a transaction which may affect the market price of listed instruments of the parties, a key question arises: when to disclose it to the market? The short answer is as soon as possible unless you have a legitimate interest in delaying the announcement, the delay will not mislead the market and the confidentiality remains protected. This note details what it means in practice.
Pursuant to MAR (Market Abuse Regulation—EU Regulation No. 596/2014 of 16 April 2014), effective throughout the European Economic Area, an issuer is required to inform the public as soon as possible of inside … Read more
M&A activity in the U.S. and globally generally fell in the month of April. The number of U.S. deals decreased by 15.6%, to 622, and the number of global deals decreased by 10.3%, to 2,530. However, the total value of U.S. deals increased by 58.1%, to $186.69 billion, largely due to the announcement of a few megadeals. Similarly, the total value of global deals decreased by 7.0%, to $317.15 billion. In terms of the average value of announced public mergers, it increased in the U.S. by 87.4%, to $300.15 million, and globally by 3.6%, to $125.35 million. Figure 4… Read more
One of the principal lessons learned from the 2007-2009 financial crisis was the need for new legal regimes to facilitate the rapid and orderly resolution of systemically important financial institutions without a government bailout. In the final part of a six-part article that has just been published, I trace the development of these new legal regimes. The United States was itself a first mover in this regard with the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
The Dodd-Frank Act contains two provisions of singular importance to the resolution of … Read more
Today, we present a debate among preeminent scholars about Columbia Law School Professor Kathryn Judge’s proposal for an emergency guarantee authority that could help contain the fallout from another financial crisis. The first piece is Professor Judge’s summary of her proposal. It is followed by responses from Professor Morgan Ricks at Vanderbilt Law School, Graham Steele at Stanford University’s Graduate School of Business, and Professor Stephen G. Cecchetti at the Brandeis International Business School and Kermit L. Schoenholtz at New York University’s Leonard N. Stern School of Business.… Read more
More than a decade has passed since the worst of the 2007-2009 financial crisis. In that time, we have learned that some of the gravest consequences of the crisis were not the economic fallout, but the political backlash it triggered. After the panic that followed the failure of Lehman Brothers, the Federal Reserve and other regulators understandably concluded that they needed to do everything in their power to prevent the failure of another systemically important financial institution. The very next day, the Federal Reserve stretched the bounds of its legal authority to provide a record amount of liquidity support to … Read more
Larry Summers, who was one of President Obama’s key economic advisors when the Dodd-Frank Act of 2010 was enacted, recently decried what he called “excessive populism” in portions of that legislation. This might seem surprising; Dodd-Frank’s technocracy-on-steroids approach (848 pages! 390 separate rulemaking requirements!) might seem like the antithesis of bust-up-the-banks populism. “My administration is the only thing between you and the pitchforks,” President Obama once famously told the nation’s leading bankers.
But Summers was referring to several specific Dodd-Frank provisions that curtailed the federal government’s financial rescue powers. During the financial crisis of 2007-2008, the Federal Reserve, the … Read more
Calming the panic in short-term funding markets was a significant part of the response to the 2008 financial crisis. While the TARP bailout programs received the most attention during the crisis, TARP never exceeded one-fifth of the government’s overall financial stability programs, which peaked at $2.4 trillion. These markets were abstract and esoteric to most Americans, but their preservation, it was argued, was crucial to preserving the financial well-being of workers, homeowners, and small businesses. As Professor Judge notes, however, the “perception that the Fed’s interventions looked out for Wall Street over Main Street has been an ongoing source of … Read more
On April 17, 2019, U.S. Secretary of State Mike Pompeo announced that President Trump would not suspend for any additional periods of time Title III of the Cuban Liberty and Democratic Solidarity Act – better known as “Helms-Burton.” Title III of Helms-Burton allows U.S. nationals whose property was expropriated by the Cuban government on or after January 1, 1959, to sue in U.S. courts anyone – regardless of nationality – who knowingly and intentionally “traffics” in that property. But, in response to strong opposition from many of the United States’ close allies and trading partners and to concerns about … Read more
Before permitting driverless cars to operate on the open road without a licensed driver, lawmakers and innovators are working to ensure the safety not only of the passengers in those cars, but also of third parties – particularly other drivers and pedestrians. Safety concerns figure much less prominently, however, in discussions about fintech and the increasing algorithmic automation of finance. While the use of algorithms in finance is nothing new, the ubiquity, sophistication, and autonomy of financial algorithms has increased significantly in recent years with advances in computing power and data usage techniques. Increasingly automated financial decision-making (a phenomenon that … Read more
Ownership structure is perhaps among the most significant corporate governance factors, as it determines the balance of power within a corporation and can directly affect governance practices and company behavior. In our review of CEO ownership, we focus on corporate governance characteristics of companies with CEO ownership concentration, and we examine the effect of CEO ownership on company performance.
- We draw a distinction between CEO ownership concentration in terms of voting power and CEO ownership in terms of a dollar value in the company’s stock. Significant ownership in value does not necessitate significant voting power.
- CEO voting power concentration is
… Read more
Economies and markets operate on the assumption that U.S. debt securities (“Treasuries”) are risk-free. This means that the United States is expected to pay its debts. Also, Treasuries are supposed to trade easily and efficiently in secondary markets. Unsurprisingly, the rate at which the U.S. borrows represents a risk-free rate against which any number of financial contracts (e.g. corporate loans, derivative securities) are priced. After the 2008 financial crisis, regulation requires financial firms to deepen their reserves of Treasuries as protection against another collapse. Perhaps most importantly, this risk-free status has enabled the U.S. to confidently rely on global capital … Read more
On April 30, 2019, the Criminal Division of the U.S. Department of Justice (“DOJ” or “the Department”) announced updated guidance for the Criminal Division’s Evaluation of Corporate Compliance Programs (“the Guidance”) in charging and resolving criminal cases. Assistant Attorney General Brian A. Benczkowski (“Benczkowski”) made the announcement at the Ethics and Compliance Initiative (ECI) 2019 Annual Impact Conference in Dallas, Texas, noting the DOJ’s effort to “better harmonize the prior Fraud Section publication with other Department guidance and legal standards.”
This memorandum highlights the key updates to the Guidance and discusses the themes present across versions of the … Read more
Companies face strong incentives to meet expectations – whether their own or those of the capital markets. A wide literature shows that this can lead to deceptive behavior by firms, which can amount to anything from overly aggressive accounting to outright fraud.
Prior research (e.g., Cohen et al. (2008)) also shows that, subsequent to the 2002 Sarbanes-Oxley Act, firms are increasingly engaging in real-activities management – that is, operating decisions taken for short-term financial benefit at the expense of long-term gain – in lieu of, or prior to, accrual-based earnings management. Yet, while we now know a fair bit about … Read more
Despite the hype, blockchain technology remains in an early phase of development. Indeed, for many public blockchain protocols, the process of building consensus around the desired trajectory of the code base remains under-conceptualized and informal. Such uncertainty has led to some sharp disagreements that have arguably damaged the legitimacy of certain protocols and increased marketplace skepticism. Indeed, there is growing recognition that, although the individuals leading development of public blockchain protocols initially eschewed the notion of formal governance and claimed that decentralization eliminated any need for it, in reality those individuals created governance structures without viewing them as such. As … Read more
In recent years, non-executive director compensation has received attention in the U.S. Increased board workloads, shifts in director compensation structure (away from meeting fees and towards slightly larger base retainers, for instance), a few instances of shareholder litigation in relation to excessive director pay, and a few voluntary submissions of management proposals asking for shareholder approval of their non-employee director compensation programs have all contributed to the activity.
Upon review of current trends in director pay, we observe a reasonable increase in total director compensation, across all market segments, and we continue to see differentiation by industry group. Although director … Read more
Let me begin by thanking the staff in the Division of Corporation Finance, including Division Director Bill Hinman, for their hard work in developing the May 3 release and for helpful briefings throughout this process.
The May 3 proposal governs the financial information firms give investors relating to mergers and acquisitions, among other things. It provides several necessary updates to our rules. But I’m concerned that the proposal treats mergers as an unalloyed good—ignoring decades of data showing that not all acquisitions make sense for investors. Thus, while I vote to open this proposal for public comment, I urge investors … Read more
On April 11, 2019, the French parliament adopted a law (the “Loi Pacte”or “Law”) that establishes a new regulatory framework for initial coin offerings (“ICOs”) of blockchain based tokens by entities established or registered in France. At the heart of the Law’s ICO provisions is an innovative framework that will allow issuers to request an optional visa from the French Financial Markets Authority (the “AMF”) prior to undertaking an ICO. ICOs of tokens that are not financial instruments will still be permitted without a visa, but the expectation is that issuers obtaining the visa for an offering … Read more
On March 20, 2019, the SEC announced the adoption of amendments to Regulation S-K intended to modernize and simplify disclosure requirements applicable to SEC reporting companies. Highlighted below are two changes of note for companies in the technology, media and telecommunications (“TMT”) sector.
Omission of Schedules to Exhibits
M&A deal activity in the TMT sector has been particularly strong in recent years. When publicly filing a merger, acquisition or similar agreement for these deals, reporting companies customarily exclude from the filing the disclosure schedules and other immaterial attachments to the agreement. While these omissions previously were permitted only for material … Read more
When it comes to the U.S. securities markets, the game has changed. Historically, the U.S. securities markets were dominated by retail investors who engaged in a buy and hold strategy: purchasing stocks as a vehicle to invest in a corporation and, if so inclined, to have a voice in a corporation’s internal governance. To that end, these investors relied heavily on corporate disclosures and filings required under the law and regulated by a number of agencies, including the Securities and Exchange Commission (the “SEC”).
Now, however, the U.S. securities markets are dominated by large institutional investors that, at last count, … Read more
Vanguard recently made three significant announcements, including an update to its proxy voting guidelines, changes to proxy voting responsibilities for its external managers and a commentary on its views and approach to corporate governance and sustainable investing.
- On Friday, April 12, the Vanguard Funds released updated Proxy Voting Guidelines [go.pardot.com], which are effective as of April 1. While the majority of the updates to the proxy voting guidelines encompass enhanced disclosure on their approach to topics such as executive compensation, governance and environmental and social policies, the Vanguard Funds highlighted three new or refined policies [go.pardot.com]
… Read more
Blockchain and other types of distributed ledger technology pose various new legal and economic questions for companies. Are crypto-asset holders a new kind of corporate stakeholder? If so, are they like shareholders or bondholders, and how can they participate in the governance of a company? Are smart contracts useful tools for corporate governance? How can free-rider problems in initial crypto-asset offerings (ICOs) be solved? What is the governance of a decentralized autonomous organization (DAO)? And is there such a thing as algorithmic or distributed governance for firms?
In a new article, “Initial Crypto-asset Offerings (ICOs), tokenization and corporate governance”, … Read more
Hedge fund activism has generated a large amount of public debate. On one side, the hedge fund activists and their academic cheerleaders argue that hedge fund activism is good for shareholders and society at large. On the other side, potential target companies, their law firms, politicians, and commentators (including academics and judges) blame it for undermining companies and long-term investment. Yet a decade’s worth of research shows that neither side is right.
Up to the mid-2000s, there was little persuasive evidence that shareholder activism generates any economically meaningful improvements in share prices or the operating performance of corporations. Commentators pinned … Read more
How much compensation does a CEO really end up with? It’s a tough question to answer – the summary compensation table is often cited as what the CEO is paid, but the ultimate value that an executive realized from those grants can differ significantly from the amounts disclosed.
For years, companies have recognized this potential discrepancy; since even before the advent of say-on-pay, companies in perilous performance positions have turned to alternative measures of pay to demonstrate that executives have shared in the pain that investors feel in their portfolio values. These alternatives have included various forms of realizable and … Read more
In 2018, U.S. companies spent $1 trillion to buy back their shares, while they spent $4 trillion to do so between 2008 and 2017. This is raising strong criticism from different quarters in the political sphere. Not only do key Democrats consider it an anathema, but Republican Senator Marco Rubio proposed to end the preferential tax treatment of share buybacks. Other Republicans, though, see it as normal.
There is no substantial financial and economic difference between the distribution of a special dividend and a share buyback. However, dividends are taxed immediately, while share buybacks induce an … Read more
On April 23, the Federal Reserve Board (the “FRB”) proposed a new, comprehensive framework for determining “control” under the Bank Holding Company Act (“BHC Act”) and Home Owners’ Loan Act (“HOLA”). We provide a high-level overview of the proposal below. Comments on the proposal will be due 60 days after its publication in the Federal Register.
The proposal is intended to simplify and clarify the FRB’s standards for determining whether a company exercises a controlling influence over the management or policies of another company and, therefore, “controls” the other company under the BHC Act or HOLA. The proposal would codify … Read more
How will artificial intelligence (AI) influence the workplace of the future and thereby the human working condition? The focus of this discussion has been on the rather tautological conclusion that many current jobs will eventually be performed by machines. In our research we have come to the conclusion that the consequences of automation may not be that one-sided. We acknowledge the rapid development in machine learning, AI, and related fields. But, we also would like to point out that the answer to questions like, “Who will win: humans or machines?” is clear. Considering current advances in computing, and acknowledging that … Read more
The U.S. Securities and Exchange Commission (SEC) recently identified incidents in which top executives sold shares before disclosing to the public negative information about cyberattacks. For example, the former chief information officer of Equifax, Jun Ying, exercised his stock options and sold nearly $1 million in shares about a week before Equifax disclosed the hack of its database in September 2017, gaining $480,000. Equifax stock dropped over 30 percent after news of the data breach became public. Motivated by the SEC’s concerns, we examine the relation between insider trading and corporate disclosure policies around cyberattacks.
When a cyberattack with material … Read more
After becoming one of the first countries to authorize the registration and transfer of unlisted securities using blockchain technology, France has adopted an innovative legal framework governing initial coin offerings (“ICOs”) and digital assets services providers (“DASPs”) with the aim of being at the forefront of the blockchain revolution in Europe.
After allowing the representation and transmission of unlisted securities through the use of blockchain technology in 2017, the draft “PACTE” bill (the “PACTE Act”) was adopted by the French Parliament on April 11, 2019, constituting a new step in France’s economic transformation.
This PACTE … Read more
Women are starkly underrepresented on corporate boards and more generally in leadership positions. Hillary Clinton’s U.S. presidential campaign and movements like #MeToo have recently attracted lots of attention to gender equality issues. As a result, biases, stereotypes, and female under-representation in leadership positions are widely debated.
In our recent working paper, we ask to what extent public attention to gender equality problems helps to reduce gender biases and stereotypes and to advance female representation in leadership positions. This is an important question because experiments in the psychology literature provide mixed evidence. On the one hand, some suggest that raising awareness … Read more
Integrated reporting is a business process that culminates in the publication of a report that explains how an organization creates value over the short-, medium-, and long-term. In terms of content and time horizon, an integrated report is similar to a company’s long-term plan.
The first integrated reports were published in the early 2000s by corporate pioneers that did not have generally accepted standards or a common framework to guide the preparation of their reports. Every report was unique in the way it reflected each organization’s thinking about what content would best improve a readers’ understanding of the company. The … Read more
On April 8, 2019, the Federal Reserve proposed a broad overhaul of the 2011 regulations governing resolution planning (the “Proposal”), which would significantly reduce the frequency of submissions and simplify requirements for many resolution plans. The Proposal would modify the existing rule to incorporate the experience gained since the first plans were filed in 2013 to target planning efforts on key resolvability issues, while codifying the focus on the eight U.S. global systemically important banks (“U.S. G‑SIBs”). Most significantly, the U.S. G-SIBs would only file resolution plans every two years alternating between full resolution … Read more
Lord Denning, a highly quotable British judge, once remarked:
“As a moth is drawn to the light, so is a litigant drawn to the United States.”
Some reasons for this strong attraction are obvious: (1) the U.S. (and only a few other nations) authorize opt-out class actions; (2) the U.S. permits (and generously awards) contingent fees; (3) the U.S. has no “loser pays” rule (and most other countries do); and (4) the U.S. uses juries in civil cases and permits punitive damages.
As I discuss in a recent paper posted on SSRN, available here, the strongest evidence of … Read more
What does boardroom culture yield when a board commits to a broad embrace of diversity—including diversity of gender, ideas, ethnicity, race, education, age, and skills? Do chances improve for decisions that help lead the company to maximize its potential and meet its leadership responsibilities? And if so, how?
Given all the research data about boardroom diversity, it’s tempting to turn to data for answers. Yet data are limited in what they can tell us about how diversity affects boardroom culture and leadership. By contrast, examining the experiences of directors who have served on a board that embraced—or didn’t embrace—diversity as … Read more
In a recent paper, we explore EU law covering EU cross-border mergers. These are typically more difficult and costlier than purely national mergers. Additionally, political hurdles can exist. In a time of global political and institutional transformations away from open markets and towards protectionism, the opposition to takeovers and mergers based on public interest considerations, such as national security, sees a revival.
This trend towards protectionism, together with a focus on industrial policy, has different facets. For example, recently France and Germany seemed to defend the idea of European champions, corporations that can compete on the global financial and … Read more
Blockchain technology continues to be a lively topic of conversation in legal, business and technology circles. This includes heated debates about whether and when the technology will deliver on its many promises and how the most common applications employing blockchain—that is, cryptocurrencies and other types of digital tokens—should be regulated in the United States and globally. Despite having experienced “crypto winter”—including a precipitous drop in cryptocurrency values, persistent skepticism about blockchain applications and a growing regulatory focus on the technology—many are convinced that the technologies underlying the blockchain are here to stay, and may hold great promise as a solution … Read more
The advent of the “shareholder rights plan,” more popularly known as the “poison pill,” fundamentally altered the trajectory of American corporate governance. Intended to defend vulnerable boards from corporate raiders, the poison pill was embraced by U.S. managers in the 1980s as a lifeline in a sea of hostile takeovers. When pundits predicted an imminent wave of hostile takeovers in Japan in the mid-2000s, Japanese boards appeared to embrace the poison pill with equal enthusiasm.
Japan’s experience might have been evidence that corporate governance around the world was destined to converge on the American model – but for two inconvenient … Read more
On March 27, 2019, journalists affiliated with Reuters reported that the Kunlun Group (“Kunlun”), a China-based tech firm, was preparing to sell its wholly owned subsidiary, Grindr, after the Committee on Foreign Investment in the United States (“CFIUS”) informed the group that Kunlun’s continued ownership of Grindr constituted a national security risk. This forced divestiture of Grindr is a pointed reminder that CFIUS remains focused on protecting the sensitive personal data of U.S. citizens, has the power to upend closed deals that have not been cleared by the committee, and is dedicating increased resources to the review of transactions that … Read more
In spite of intensive academic research on capital expenditure efficiency, how firms make investment decisions remains largely a black box. We analyze that process by dividing it into two stages: budgeting of capital expenditures (CapEx) and execution of the budget. We find that these two stages have different effects on investment efficiency, and are in turn affected differently by accounting quality and governance. Further, while opportunistic managers massively exceed investment budgets, managers with high ability strategically find a level of execution errors that optimizes their compensation while remaining undetected by boards. These strategic execution deviations entail significant costs for their … Read more
As we enter the peak of proxy season, we review executive compensation trends in the U.S. based executive pay disclosures so far this year. Our key findings include:
- Compensation disclosures so far suggest continued increases in CEO pay across all market segments and almost all industries.
- The proportion of stock-based compensation as a percentage of total pay continues to increase, crossing the threshold of 50 percent of total pay for large companies for the first time this year.
- Performance-based equity compensation also continues to increase despite concerns of a potential reversal in the aftermath of the repeal of 162(m).
… Read more
Depository institutions have been understandably reluctant to provide banking services to cannabis-related businesses in light of the significant (and costly) regulatory and compliance expectations that apply under the Bank Secrecy Act (BSA) and other anti-money laundering (AML) laws and regulations. Legislative relief, however, may be on the way. On March 27, 2019, with approval of the Secure and Fair Enforcement Banking Act of 2019, H.R. 1595 (SAFE Banking Act), the US House Financial Services Committee (HFSC) is now seeking to increase access to banking services for cannabis-related businesses and their service providers. The SAFE Banking Act, which was … Read more