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The Impact of Socially Responsible Customers of Corporations

Corporations worldwide are increasingly integrating corporate social responsibility (CSR) into their operations and emphasizing ethical, safe, and sustainable business practices. Also, anecdotal evidence suggests that many of these corporations are concerned about not only their own CSR standards but also those of their suppliers. Some scholars argue that the increasing popularity of CSR comes in part, in response to the repeated failures of laws and regulations protecting stakeholders, prompting stakeholders to protect their own interests by pushing companies to engage in CSR. However, it is not clear whether corporate customers, among the most important stakeholders, are pushing suppliers to engage … Read more

ISS Offers Overview of Vote Requirements at U.S. Meetings

At the general meeting of Tesla Inc. on June 11, 2019, two management proposals seeking to introduce shareholder-friendly changes to the company’s governance structure failed to pass, despite both items receiving support by more than 99.5 percent of votes cast at the meeting. To get official shareholder approval, the proposals needed support by at least two-thirds of the company’s outstanding shares. However, only 52 percent of the company’s share capital was represented at the general meeting; based on turnout alone, there was no possible way for the proposal to pass.

As strange as the voting outcome at Tesla may seem, … Read more

Political Connections and Insider Trading

The media, investors, and regulators often consider trading by corporate insiders to be a signal of firm value, given that insiders know their business better than do others. Although trading on material, non-public information can be illegal in the U.S., insiders may still attempt to profit from their informational advantage, as evidenced by dozens of insider trading enforcement actions each year.

Research also suggests that politically connected firms may avoid investigations by, or receive lower penalties from, regulatory agencies. And since insiders are the ones who decide to build political connections for the firms, they may do so to seek … Read more

How Are Bankers Paid?

Bank behavior and how it relates to bank fragility and systemic risk have been in the spotlight since the 2007-2009 financial crisis. Regulators claim that bankers’ compensation structures played a role in encouraging behavior which contributed to the financial crisis. Despite this, we know little about how finance industry executives are compensated. Executive compensation research typically does not distinguish finance industry executives from non-finance industry executives, and on many occasions it excludes executives in financial industries. Our new article, How Are Bankers Paid?, fills this void, studying how executive compensation in the finance industry differs from that of non-financial … Read more

Revisiting Compliance Program Reporting Relationships

Corporate leaders may wish to revisit the important yet sensitive topic of reporting relationships in compliance programs following the release of new guidance from the Department of Justice’s Criminal Division.

That guidance, entitled Evaluation of Corporate Compliance Programs[1], (The “New Guidance”) discusses in detail the three main thematic questions that prosecutors should apply in evaluating corporate compliance programs and how those questions can be used to elicit information as to compliance program adequacy and effectiveness. One of those thematic questions is whether the corporation’s compliance program is being implemented effectively. The autonomy of compliance program leadership is one … Read more

Interpreting Organizational Documents in the Private Ordering Era

Private ordering has become a common way to restructure key aspects of public corporation governance. Stockholder activists and boards of directors alike are testing the bounds of the freedom to contract in the charter and bylaws, adopting provisions aimed at reshaping the balance of power in corporations. In considering recent efforts, the courts have largely shown a willingness to uphold these governance arrangements. With no sign that courts will restrict corporate governance contracting[1] and every indication that the private ordering trend will persist, the focus of legal battles will shift from the validity of contract provisions to their meaning. … Read more

Can Blockchain Create a Corporate-Governance Revolution at Public Companies?

In a new paper, we analyze the major disconnect between the theory of corporate governance, its legal expression, and the reality of corporate ownership structures, based on an “indirect holding system” (IHS), which has evolved from complex existing technological limitations. We argue that distributed ledger technology (DLT) offers the potential to redesign the company registry and securities clearing and settlement systems for public companies and realign them with theory. While doing so, we also seek to transcend the hype around DLT. While carefully considering the current financial market’s path dependence, we assess the actual and substantial potential of DLT … Read more

ISS Discusses Dual-Class Shares: Governance Risks and Company Performance

Initial public offerings of companies with dual-class shares have made headlines in recent years. An increasing number of newly listed companies have introduced classes of stock with superior voting rights, which typically allow company founders and top executives to maintain company control even as their economic stake in the business may diminish. Dual-class companies include some of the most successful and highly-valued companies in the world, such as corporate giants Facebook Inc., Alphabet Inc. (parent of Google), and Berkshire Hathaway Inc. In 2019, some of the largest U.S. IPOs involved classes of stock with superior voting rights, including … Read more

Marshalling Reputation to Minimize Problematic Business Conduct

Notwithstanding the attention corporate reputation gets as a concept, why it is valued, what it requires, and what is incompatible with a good reputation are given surprisingly short shrift. Institutional investors are increasingly pressuring companies to care about more than short-term profits, and indeed, to care about their social purpose, which is often at least arguably related to long-term profitability.  There is a more general movement encouraging corporations to take into account corporate social responsibility and ESG (environmental, sustainability, and governance) concerns. There are also forces, notably after the 2008 financial crisis, pushing companies to take ethics and culture more … Read more

The Effect of Corporate Visibility on Social Responsibility

The general public can be a stakeholder in a firm, even when it does not have direct ownership. And as the public becomes more vested in a firm’s actions, the firm may be more likely to engage in corporate social responsibility (CSR) activities.

In a recent paper, we use public visibility as a proxy for the public’s stake in a firm. Based on 3,400 newspapers from 1994 to 2008, we measure visibility for the U.S. S&P 500 firms with the frequency of print articles per year concerning the firm. We find that visibility has a significant, positive relationship with the … Read more

The Long-Term Effects of Shareholder Activism

Shareholder activism is growing in popularity across the world and appears to deliver mostly benign results for firms and stockholders. However, testing the effects of activism is problematic.  For at least 30 years, researchers have recognized the difficulty of causal inference when examining ownership and performance.  Perhaps activists systematically target firms that are poised to improve anyway or select liquid stocks to cheaply acquire blocks.  Despite a body of empirical evidence on the positive effects of activism, critics continue to warn of dangers: Activists hunt in highly-motivated and well-resourced wolf packs that exploit regulatory loopholes; they focus on short-term financial … Read more

Blockchain Developers and Fiduciary Duty: An Ill-Fitting Framework

By enabling new modes of human interaction, technological advancements catalyze the evolution of regulatory frameworks, tools, and approaches. The rate at which computer technology evolves outpaces that of legislation and rule-making. Our economy is increasingly structured not only by traditional fiduciary actors, but also by software systems, which allow assets to permeate markets rapidly and at a greater scale.  Rightfully, scholars and regulatory officials are examining the liability frameworks for software developers, and blockchain technologies dramatically demonstrate the challenge of scrutinizing an interconnected software system. Blockchain technologies emerged outside of institutions, and blockchain-based transactions bypass regulatory control.

We have explored … Read more

ISS Discusses U.S. Board Diversity Trends in 2019

As the U.S. annual shareholder meeting season is coming to an end, we review the characteristics of newly appointed directors to reveal trends director in nominations. As of May 30, 2019, ISS has profiled the boards of 2,175 Russell 3000 companies (including the boards of 401 members of the S&P 500) with a general meeting of shareholders in 2019. These figures represent approximately 75 percent of Russell 3000 companies that are expected to have a general meeting during the year. (A small portion of index constituents may not have a general meeting during a given calendar year due to mergers … Read more

Index Funds and the Cost of Engagement

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

ISS Offers Early Take on 2019 U.S. Proxy Season Vote Results

As the busiest part of the 2019 U.S. proxy season is behind us, we take an early look at the vote results of annual general meetings convened from January to May. As of now, approximately 70 percent of Russell 3000 annual general meetings expected during the calendar year have already taken place, and the figure will rise to close to 90 percent of all calendar-year annual meetings by the end of June. In our review of the vote results for the 1,812 Russell 3000 2019 annual general meetings that took place from January to May and are available in the … Read more

How to Increase Gender Diversity on Private Company Boards

There are more women than ever on public company boards, but private companies have not kept pace. Legal scholarship has tended to focus on women on public company boards perhaps in part due to the relative absence of information about private companies. Even though private companies, particularly high tech companies, have transformed people’s daily lives, they operate in relative secrecy. They are also able to remain private for longer compared with their earlier counterparts due to the unprecedented availability of capital from venture capital firms, corporate venture capital,[1] mutual funds,[2] sovereign wealth funds, and other sources. By operating … Read more