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The Case Against Passive Shareholder Voting

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In the past few years, investors have begun to embrace the reality that academics have been championing for decades—that a broad-based passive indexing strategy is superior to picking individual stocks or actively managed mutual funds. As a result, millions of investors have abandoned actively managed mutual funds, or “active funds,” in favor of passively managed funds, or “passive funds.” This past year alone, investors withdrew $340 billion from active funds (approximately 4 percent of the total) while investing $533 billion into passive funds (growing the total by 9 percent).

This historically unprecedented shift is good news for investors, who benefit … Read more

Corporate Governance Consequences of Passive Investing

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The popularity of index funds, which automatically track an index of stocks, is continuing to grow in the U.S, and, albeit less intensely, in the EU. Due to the high concentration of the index funds industry, the exponential rise of mutual funds designed to track stock indices has had significant corporate governance implications. Specifically, passive investing significantly affects listed companies’ ownership on both sides of the Atlantic. The three leading passive fund managers (BlackRock, Vanguard, and State Street) make up an increasingly important component of the shareholder base of listed companies, as they hold relevant stakes (usually not exceeding 5 … Read more

The Case for Doing Nothing About Common Ownership of Competing Firms

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One of the hottest antitrust topics of late has been institutional investors’ “common ownership” of minority stakes in competing firms.  Writing in the Harvard Law Review, Einer Elhauge proclaimed that “[a]n economic blockbuster has recently been exposed”—namely, “[a] small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.”  In the Antitrust Law Journal, Eric Posner, Fiona Scott Morton, and Glen Weyl contended that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.”  Those same authors took to … Read more

Dechert discusses SEC’s Settled Administrative Proceedings Against NYSE

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The Securities and Exchange Commission (SEC or Commission) on May 1, 2014 announced a settlement (Settlement) with the New York Stock Exchange LLC and certain of its affiliates (collectively, the NYSE), addressing a variety of practices – including informational disparities and the current hot-button topic of co-location.[1] In this latest settlement concerning electronic trading and the dissemination of market data,[2] the NYSE agreed, without admitting or denying the SEC’s findings, to settle charges relating to a wide variety of historic conduct that largely took place between 2005 and 2011. As part of the Settlement, the NYSE consented to a $4.5 … Read more

Index Funds and the Cost of Engagement

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Institutional ownership of companies has grown to the point that institutions today own approximately 80 percent of the market value of U.S. stocks.[1] Recent academic research explores this rising ownership concentration and debates the growing importance of “passive” or “index” investors.[2] This literature raises concerns that asset managers in general, and index funds in particular, may be becoming too powerful, while also exhibiting conflicts of interests. Some commentators, therefore, suggest that index funds have become so powerful, they will cast the deciding vote on any proxy battles between activist investors and corporate management. Others see a conflict of interest resulting … Read more

Top 10 Corporate and Securities Law Articles for 2018

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The Corporate Practice Commentator is pleased to announce the results of its twenty-fifth annual poll to select the ten best corporate and securities articles.  Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2018.  Just short of 400 articles were on this year’s list.  Because of the vagaries of publication, indexing, and mailing, some articles published in 2018 have a 2017 date, and not all articles containing a 2018 date were published and indexed in time to be included in this

… Read more

Is Shareholder Voting an Effective Corporate Governance Tool?

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Proponents of shareholder voting argue that restricting it would reduce the ability of shareholders to hold management accountable. The implication of this argument is that mandating equal voting rights for all shares will benefit shareholders. However, the evidence as to the effectiveness of shareholder proxy voting is inconclusive (see, e.g., Ertimur et al. (2011), Armstrong et al. (2013), and Larcker et al. (2015), among others). One of the limitations of prior studies that examine the efficacy of shareholder voting is that the optimal voting decision for a given proxy item is often unclear. For example, one major proxy voting issue … Read more

Cadwalader Discusses CFIUS and Foreign Investor Deals

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The national security implications of corporate deals involving foreign investors continues to be a headline-grabbing topic. Last summer, President Trump signed into law the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which expanded the types of transactions subject to national security review by the Committee on Foreign Investment in the United States (“CFIUS”). As we approach the first anniversary of FIRRMA, it has – unsurprisingly – made it more critical than ever to identify and address whether a cross-border deal involving non-U.S. parties is subject to CFIUS review and approval, and if so, to … Read more

Finding Friends Is Hard: Long-Term Investors’ Relationship with Proxy Advisers, Activists, and Equity Funds

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Institutional investors are howling for US public companies to focus more on the long-term.[1]  This is unsurprising. Long-term focused companies produce significantly better results over time, reporting far greater revenue growth with less volatility, far higher levels of economic profit, and greater total return to shareholders.[2] So if you are holding stock for a long time, a long-term focus for your portfolio companies is critical.

And as every new dollar flows from actively managed funds to passive strategies[3], reducing the ability of funds to trade nimbly in and out of stocks, long-term stewardship naturally emerges as … Read more

Toward a Mission Statement for Mutual Funds in Shareholder Litigation

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Mutual funds own approximately 30 percent of the U.S. equity market, and the Big Three fund families – Blackrock, Vanguard, and State Street – are the largest blockholders in the vast majority of large, publicly traded companies.  This has made mutual funds a force to be reckoned with in American corporate governance.  Mutual funds tout their active engagement in corporate governance and claim to be “good at it.”  But are they?

Traditionally, there are three levers of power in corporate governance: voting, selling, and suing.  Selling is not an option for many mutual funds – especially index funds, ETFs, and … Read more

Gibson Dunn Offers 2019 Mid-Year Securities Enforcement Update

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The first half of 2019 has seen a continuation of the Securities and Exchange Commission’s emphasis on protecting the interests of Main Street investors. Chairman Clayton reiterated these themes in his testimony in May before the Financial Services and General Government Subcommittee of the U.S. Senate Committee on Appropriations.[1] In addition to the no less than 43 references to Main Street investors, the Chairman’s testimony highlighted: (1) the Retail Strategy Task Force, formed in 2017, to use data-driven strategies to generate leads for investigation of industry practices that could harm retail investors, as well as (2) the mutual fund … Read more

Libra: The Regulatory Challenges Facebook Ignored

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The announcement on June 18 by Facebook of what it calls “a simple global currency and financial infrastructure that empowers billions of people” was sure to receive immediate attention. Facebook founder and CEO Mark Zuckerberg is now on a global “mission.”[1] However, the Libra White Paper is long on Libra’s technology and short on the regulatory challenges it faces around the world.

  • The diagnostic

The need for Libra is based on a diagnostic: People lack access to a global, open, instant, and low-cost way to move money. The project focuses on international payments.

Why is cross-border payment expensive? First, … Read more

How to Craft Policies on Innovative Corporate Law Provisions

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Although states stand to earn significant revenue from developing a system of corporate law and encouraging companies to incorporate under it, most tend not to make the necessary investments.  That may be perfectly rational.  After all, a state may not capture much value from creating superior corporate laws because other states can simply amend their statutes to include the same sorts of provisions.

Many of the debates over controversial corporate law provisions proceed with both sides arguing that particular provisions will increase or diminish shareholder welfare.  Take Delaware’s debate over fee-shifting bylaws and charter provisions as an example. Opponents argued … Read more

Guarantor of Last Resort: Is There a Better Alternative?

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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

SEC Chief Accountant Talks the Future of Financial Reporting

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I’m grateful for the opportunity to visit Baruch College’s Zicklin School of Business and speak at the annual financial reporting conference for the fourth time. Many students who were starting their collegiate work here when I first spoke at this conference are now members of the graduating class.

I could use other examples in tracking changes to make the same point: the world stops for no one. Financial reporting is not exempt from change. This conference also provides an opportunity to talk about current issues in financial reporting and to peer into the future together and explore the role of

… Read more

ISS Discusses Corporate Governance in Emerging Markets

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Analyzing corporate governance at companies in emerging markets can be really tough. A combination of differing regulatory standards, disclosure requirements, market norms, local investor preferences, and more all collude to make the evaluation of governance structures difficult. Giving credit where due, emerging market economies have made significant corporate governance strides over the past decade, as the adoptions and revisions of governance codes and relevant regulations have led to better disclosure standards, higher levels of board independence, and more shareholder protections.

Despite these developments, emerging markets continue to have a unique set of characteristics which require special attention when assessing corporate … Read more

Auditing Is Too Important to Be Left to the Auditors!

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Clemenceau was right.[1]  Reforming a profession cannot be left to the professionals. A cascade of auditing scandals — in the U.K., the U.S., Europe, and South Africa — has convinced many that reform is necessary. The political reaction has been the most intense in the U.K., where two governmental reports were released last month, each sharply critical of the auditing profession and its regulation. One has called for a new audit regulator that would be financially independent of the industry,[2] and the other by the U.K.’s Competition and Markets Authority (“CMA”) has proposed a number of measures to … Read more

The Effect of Common Ownership on Profits: Evidence from the U.S. Banking Industry

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In recent years, large asset managers and other institutional investors have come to own increasingly large shares of firms that are competitors. For instance, BlackRock owns shares of both Bank of America and JPMorgan Chase. Such common ownership is prevalent in many industries. For example, the graph below illustrates the prevalence of common ownership in the U.S. banking industry. It shows the ownership stakes by the five largest bank shareholders in seven of the largest U.S. banks, and in all public banks combined:

Figure 1 Ownership stakes by the five largest bank shareholders in seven of the largest U.S. banks, … Read more

Wachtell Lipton Offers Thoughts for Boards of Directors in 2019

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In recent years, it has become increasingly evident that the activism-driven corporate world is relatively fragile and is proving to be unsustainable, particularly when viewed in the broader context of rapidly changing political and social norms and increasing divisiveness across many planes of the social contract.  The exponential widening of income inequality, the increasing sense of urgency around climate change, and the widespread socioeconomic upheaval resulting from the displacement of human capital by technology have all been filtering into the debate about the role and governance of the corporate ecosystem.  Persuasive academic and empirical evidence has established the causal link … Read more