How Dual Class Share Structures Affect Innovation

In a new paper, we seek to fill a gap in research on the possible benefits of dual class share structures and how they might promote innovation. We start with a bit of history.

Shareholder democracy has been fundamental to the global rise of equity markets since the mid-19th century. The rule of one-share, one-vote sought to balance two competing interests: 1) entrepreneurial insiders wanting to maintain their control of the firm after the public offering of shares, and 2) minority shareholders concerned about the expropriation of their funds through dividend rights, private benefits of control, etc.  However, dual … Read more

Sullivan & Cromwell Discusses Hot Topics in Corporate Governance

Corporate Governance, Surveys, Policies and Reports

  • Lazard Report Finds Increased Shareholder Activism in Q1 2018: Lazard’s Quarterly Review of Shareholder Activism for Q1 of 2018 found increased activism by shareholders in terms of number of campaigns initiated, board seats won and capital deployed. Seventy-three new campaigns were initiated in Q1 2018, compared to 67 in Q1 2017 and 62 in Q1 2016. Sixty-five board seats were won in Q1 2018, compared to 41 in Q1 2017 and 100 for the entirety of 2017. $25 billion in capital was deployed in new campaigns for Q1 2018, the most in any

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The Consequences of Restatements for Outside Directors

Serving on a public company’s board of directors carries responsibilities and risks as well as benefits for directors.  If directors do not carry out their duties effectively, they risk damaging their reputation, losing their board seats, and facing shareholder lawsuits.  In a recent paper, “Consequences of Restatements for Outside Directors,” I review the academic literature to identify the consequences directors face if the company on whose board they serve must restate its financial reports.

A restatement is required when a firm, its auditor, or the SEC finds that a prior period financial statement is materially inaccurate, forcing the company to … Read more

Corporate Social Responsibility v. Corporate Shareholder Responsibility

Whether corporate social responsibility (CSR) is beneficial to shareholders remains a topic of considerable debate. Recent studies suggest that some socially beneficial corporate expenditures (e.g., to reduce environmental harm and thereby the firm’s risk exposure) create value for shareholders. In contrast, other types of such expenditures (e.g. to improve the environment beyond what is necessary to comply with the law or mitigate risk), are not viewed by shareholders as value-enhancing. However, there is no evidence on whether individual firms differentiate between CSR expenditures that do and do not benefit shareholders.

In a recent study, we examine differences in the CSR … Read more

How External Whistleblower Rewards Affect Internal Reporting

Does paying employees for blowing the whistle on corporate crime to regulators discourage internal reporting and undermine corporate governance? The answer is not as simple as it might seem. My research shows that, as the amount of reward increases, the probability of internal reporting rises at first but then falls.

The question has been discussed in countries that have introduced or contemplated the introduction of legislation to reward whistleblowers but has not yet been fully analyzed. One of the overlooked obstacles is that the standard of proof for external whistleblowing cases is higher than for cases of internal reporting, and … Read more

Is Delaware Asleep at the Wheel (Again)?

Beginning at least as far back as Professor William Carey’s famously withering 1974 Yale Law Journal article about Delaware’s “enabling” of bad corporate actors, critics of the state’s corporate jurisprudence have alluded to a “race to the bottom” in which the state legislature and judiciary turn a blind eye to managerial agency costs in order to attract new business and maintain Delaware’s dominant franchise in corporate law.

But over the past two decades, a better metaphor for the state’s corporate oversight may be a pinball ricocheting from crisis to crisis, with jurisprudential vigilance varying according to the degree of exigency … Read more

Wachtell Lipton Discusses Boards’ Role in Sustainability and Corporate Social Responsibility

In light of evolving—and sometimes actively debated—perspectives on the role of public companies with respect to sustainability, corporate social responsibility and other ESG matters (e.g.,  Barron’s recent report on Sustainable Investing), we are providing a high-level overview of how boards of directors and senior management teams may wish to approach these issues:

  • Be aware that sustainability has become a major, mainstream governance topic that encompasses a wide range of issues, including a company’s long-term durability as a successful enterprise, climate change and other environmental risks and impacts, systemic financial stability, management of human capital, labor standards, resource

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New Data Shed Light on Mutual Fund Time Horizons

Short-termism is a loaded phrase in debates over investment time horizons, often used to criticize investors and corporate managers deemed overly focused on near-term gains at the expense of long-term value. One argument is that U.S. mutual funds, as significant investors, are preoccupied with quarterly earnings, which feeds the quarterly anxiety of corporate boards of directors. As such, short-termism is a contagion that can spread from funds to firms. Its proponents, on the other hand, highlight short-term investors’ ability to unlock firm value and counter corporate management’s long-term bias.

In a new project, The Long and The Short: Portfolio Turnover Read more

How Exchange Listing Affects Corporate Governance

On April 3, 2018, the Swedish online music company Spotify Technology disrupted the traditional initial public offering (IPO) marketplace when it directly listed its shares on the New York Stock Exchange (NYSE) under the ticker symbol “SPOT.” With a valuation of $26.5 billion at the end of the first day of trading, it was one of the largest technology listings for the NYSE since Facebook. [1] While seemingly just another tech venture IPO, this offering represented a watershed event.

The common motivations for firms listing on public stock exchanges such as the NASDAQ or the NYSE are to raise large … Read more

Wachtell Lipton Discusses Shareholder Activism, Corporate Governance, and the Hunt for Long-Term Value

As the spotlight on boards, management teams, corporate performance and governance intensifies, as articles like the Bloomberg and Fortune profiles of Elliott Management (“The World’s Most Feared Investor—Why the World’s CEOs Fear Paul Singer” and “Whatever It Takes to Win—How Paul Singer’s Hedge Fund Always Wins”) and other activist investors become required reading in every boardroom and C-suite, and as activist campaigns against successful companies of all sizes increase worldwide, below are fifteen themes expected to impact boardroom, CEO and investor behavior and decision-making in the coming years.

1. The CEO, the Board and the Strategy

  • The relationship of the

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How Management Manipulates Voting on Its Own Proposals

Shareholders can generally affect the decisions of companies in two ways: through voice (voting) and through exit (selling their shares). In a new paper, “Management (of) proposals,” we use shareholder voting records on management proposals from 2003 to 2015 to evaluate the effectiveness of voice as a governance mechanism. We analyze whether management opportunistically brings up more proposals in good times and whether it systematically games the voting process to achieve a favorable outcome.

We find first that managers opportunistically choose to hold shareholder votes following good firm performance. We examine this further in the context of the … Read more

Fried Frank Discusses the Obligations of LLC Directors and Managers

There are now more than twice as many entities formed in Delaware as LLCs and other alternative entities as are formed as corporations. Private equity funds and hedge funds often are formed as LLCs or limited partnerships to take advantage of the structural flexibility and tax treatment available. A key advantage is the ability to modify or eliminate traditional corporate-type fiduciary duties and, specifically, to facilitate conflicted transactions which arise due to the fund managers’ various roles in managing multiple funds. Below we outline the key principles relating to the obligations of LLC directors under Delaware law, offer related practice … Read more

How Non-Compete Agreements Affect CEO Mobility, Job Security, and Compensation

Firms generate profits through investments in physical and human capital.  In legal regimes that recognize property rights, the firm generally has full ownership over its physical capital, as well as the right to future cash flows generated by these assets.  However, human capital is inherently different from other forms of capital because firms cannot “own” employees or the investments made in these employees. Common law, however, sometimes makes an exception for certain restrictive covenants like non-compete agreements – covenants signed by an employee not to compete with her employer for some specified period after employment ends. Non-compete agreements limit employees’ … Read more

How Non-CEO Inside Directors Add Value After an Unplanned CEO Exit

The CEO-firm match theory posits that the CEO labor market is efficient and competitive and that the matching between CEOs and firms is optimal. However, both anecdotal and empirical evidence show that CEO departures, particularly unplanned CEO departures, can be disruptive, create friction (i.e., costs associated with appointing a non-optimal CEO replacement), and significantly and negatively affect shareholder value. In a new paper, we demonstrate that the presence of non-CEO inside directors (NCIDs) can help firms reduce friction costs and improve performance during unplanned CEO transitions. Using a comprehensive, manually collected data set of unplanned CEO departures from 1993 to … Read more

Wachtell Lipton Discusses the Pros and Cons of Directors’ Notes

“To take notes or not to take notes – that is the question” often asked in corporate board rooms today. As a matter of good governance, it is important that the minutes serve as the single, clear, official record of each in-person or telephonic board and committee meeting. Board materials that are circulated and discussed at the meeting should be part of the official record and either attached to the minutes or maintained in the corporate secretary’s files, as appropriate. In connection with significant transactions, board minutes will be reviewed by third parties for diligence purposes and to confirm that … Read more

Does Firing a CEO Pay Off?

The chief executive officer (CEO) and the top management team are typically viewed as critical to the success or failure of companies. As it is not uncommon for top executives to make value-destroying decisions, the role of internal control mechanisms, such as oversight by a board of directors (BoD), is to safeguard the interests of shareholders by replacing poorly performing incumbent CEOs with new ones.

But does it pay to fire underperforming CEOs? Doing so can cost shareholders a bundle in severance packages and golden parachute payments. When CEOs at Hewlett-Packard, Bank of New York Mellon, Yahoo!, Kellogg’s, and United … Read more

Mergers and the Market for Busy Directors: A Global Analysis

The issue of directors serving on multiple corporate boards has come under increasing scrutiny from both academicians and practitioners. There are two types of arguments associated with the conflicting evidence of how multiple directorships affect firm value and performance. The first is a reputation hypothesis that contends individuals gain valuable experience, skills, and networks from serving on multiple boards. The competing argument, which we refer to as the busyness hypothesis, is that these individuals are over-committed and thus unable to provide the careful monitoring and diligence that their positions require. The literature has not yet established whether the reputation or … Read more

Cleary Gottlieb Discusses Long Term Investors’ Duty to Revive the Staggered Board

Beyond the cacophonous din of voices calling for companies to serve a “social purpose,” adopt a variety of governance proposals, achieve quarterly performance targets, and listen to (and indeed even “think like”) activists, there is now, most promisingly, a call from genuine long term shareholders for public companies to articulate and pursue a long term strategy.[1]  This latest shareholder demand directly supports the achievement of traditional corporate purposes, and seems, more than any other shareholder demand of the last decade, the most likely to increase shareholder value.  Yet in current circumstances, where all corporate defenses have been stripped in … Read more

Product Markets Offer New Evidence on How Board Structure Affects Firm Performance

In a new paper, we discuss our findings on how corporate board structure affects firm performance under different product market conditions. Though many studies have examined the relationship between corporate board structure and firm performance, some have found that board independence has a positive effect on performance while others have found that it has a negative effect and still others have found a statistically insignificant correlation. More recent studies, though, have taken a new perspective, examining whether the association between board independence and firm performance depends on product market demands.

Changing product market conditions can affect the need for monitoring … Read more

Wachtell’s Lipton Shines a Spotlight on Boards for 2018

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  Today, boards are expected to:

•        Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy;

•        Be aware that sustainability has become a major, mainstream governance topic that encompasses a wide … Read more