“Deal Activism,” in which activists invest to oppose announced deals, has become an increasingly frequent component of the activist playbook. While efforts by the target company’s shareholders to oppose a deal to secure a higher bid have received the most media attention, activists have also run campaigns against acquirors to block transactions outright, to extract concessions or to generate pressure against a board. This occurs most frequently in strategic, stock-for-stock transactions where votes are needed on both sides.
The recent proxy contest over EQT Corporation’s strategic merger with Rice Energy demonstrates that these fights can be fought and won. EQT … Read more
It is well known that banks play an important role in monitoring borrowing firms (e.g., Diamond, 1984). Yet, how banks choose among alternative mechanisms that reduce agency costs with borrowers is not completely understood. In our paper, “Bank Relations and Borrower Corporate Governance and Incentive Structures,” we document that, as banks and borrowers develop closer relationships, borrowing firms adopt corporate governance and incentive structures that help to reduce the banks’ risk of expropriation by the managers and shareholders.
While some bank monitoring can constrain managerial opportunism and thereby benefit debtholders and shareholders, banks also protect themselves against actions that benefit … Read more
The separation of corporate ownership from control leads to an agency problem caused by the divergent interests of shareholders (the principals) and management (the agent). One area of contention is the level of risk-taking by the firm. Managers’ investment in human capital makes them more risk-averse than shareholders are, and this difference creates losses that account in part for the agency cost of equity. To mitigate this cost, prior research suggests that managers be paid in stock and stock options, in addition to cash compensation, so that their interests are aligned with those of shareholders.
Unfortunately, the convergence of managers’ … Read more
The recently proposed Tax Cuts and Jobs Act (the “Act”) includes executive compensation tax reforms that, if enacted, would have significant implications for the way in which companies structure their compensation programs.
The Act was introduced in the U.S. House of Representatives on November 2, 2017, and may undergo significant revisions as part of the legislative process in the House, and the U.S. Senate is expected to propose tax reform legislation shortly that may not be identical to the House’s bill, even though an identical bill could facilitate enactment without the need for a joint committee to reconcile differences.
At … Read more
The SEC Division of Corporate Finance recently provided useful guidance on excluding certain Rule 14a-8 shareholder proposals (Staff Legal Bulletin No. 14I). While helpful, we hope the SEC will undertake a much-needed comprehensive review of Rule 14a-8, including its outdated eligibility requirements.
“Ordinary Business” and “Economic Relevance” Exclusions. A shareholder proposal relating to a company’s ordinary business operations may generally be excluded from the company’s proxy statement unless significant policy issues transcending ordinary business are involved (Rule 14a-8(i)(7)). Noting that this exclusion often involves difficult judgment calls (and without addressing the distinction between the SEC’s interpretive approach … Read more
In recent years, executive compensation in the U.S. has become a hotly debated issue. A central point of contention is peer benchmarking, an integral part of the pay-setting process in which firms compare their executives’ compensation with that of rivals in the labor market. Proponents of this practice claim that compensation benchmarking is an efficient mechanism used to gauge market wages within a competitive labor market, while detractors allege that it inflates pay because firms may arbitrarily select peers with generously remunerated executives.
In a recent paper, I study the dynamics of compensation benchmarking using a comprehensive, hand-collected dataset of … Read more
Hedge fund activism has transformed the corporate governance landscape – possibly for better, possibly for worse. But as activist funds emerge as the newest and most potent players in corporate governance, there is one certainty: New agency costs also arise. The activist firm has the de facto ability today to buy a significant block of stock in a target firm (typically 5 percent to 8 percent), announce a new business strategy for the target (often involving increased leverage and asset sales), and then demand board representation (generally two directors, sometimes more) to implement its strategy. Increasingly, the activist gets what … Read more
Item 402(u) of Regulation S-K was adopted in 2015 to implement the pay ratio disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and will require pay ratio disclosure with respect to the first fiscal year beginning on or after January 1, 2017 (i.e., such disclosure will be required during the 2018 proxy season). The required disclosures consist of the total compensation of the registrant’s principal executive officer, the median total compensation of the registrant’s employees other than its principal executive officer, and the ratio of the first of these amounts to the second.
One … Read more
With institutional shareholders playing a growing role in corporate governance, dialogue between boards and shareholders is increasingly common in the U.S. and Europe. Talking with boards is essential to institutional investors’ stewardship functions, and engaging with institutional investors has become a focus of listed companies’ communication strategies. Empirical analysis shows that private discussions with directors have become institutional investors’ preferred method of engagement, and they resort to shareholder proposals, public criticism, and similar practices only if private conversations fail.
Nevertheless, meetings between directors and institutional investors raise legal concerns in the U.S. and the EU, because they may lead to … Read more
Excessive risk-taking by corporate executives is often blamed for triggering the financial crisis of 2008. Therefore, it is crucial to understand the nature of corporate risk-taking so as to prevent, or reduce the likelihood of, a future crisis. In theory, managers, who represent shareholders, are expected to act in the best interest of the shareholders and only take risks that maximize shareholder wealth. In reality, managers may take either too little risk or too much.
First, managers may adopt corporate policies and strategies that are too conservative, because their human capital is invested in the company. A high degree of … Read more
When a corporation engages in misconduct, courts, regulators, or prosecutors often arrange for the appointment of a monitor—an independent, private outsider—to oversee remediation efforts at the firm. As I’ve described previously, the expansive use of monitors has become common, with some private companies even appointing them voluntarily. Monitors oversee an array of remediation efforts, from ending collusive activity, to compensating foreclosure victims, to ensuring that healthcare providers adhere to legal and regulatory mandates.
The variety of situations involving monitors has made regulating them a challenge. Creating a single regulatory or statutory scheme would be difficult, given that so many … Read more
Corporate short-termism has been much discussed over the past few decades, but has recently become a growing concern for the U.S. economy. Executives and politicians warn of increased market pressure on corporations to meet short-term performance metrics at the expense of long-term value creation and sustainable growth. Sheila C. Bair, former chair of the FDIC, lamented in an op-ed piece that efforts to prevent the financial crisis “were impeded by the culture of short-termism” in both the financial and political arena.
Some empirical evidence is consistent with these concerns; surveys of executives, analyses of firm investments, and various anecdotes point … Read more
Directors of regulated financial institutions have exceedingly difficult jobs with many demands. The aftermath of the financial crisis led to countless new regulatory requirements and expectations, many of these unwritten and evolving based on political currents or varying views at different levels of the regulatory hierarchy. Governance processes and actions are examined and second-guessed like never before. For many companies, new and shifting compliance burdens tend to crowd out other business on board agendas.
At the same time, these boards have faced prolonged operating and economic challenges. Initially, defaults and delinquencies in loan portfolios and low interest rates choked financial … Read more
An important feature of U.S. corporate law is regulatory competition among various states. Unlike firms in other industrialized countries, American corporations can choose to incorporate in any state, even if they do not do business there. A large body of academic literature has studied the merits and weaknesses of this approach to regulating corporations, focusing primarily on the value of state corporate laws. This debate has focused on two competing hypotheses. In the first, interstate competition in corporate laws promotes a “race to the top” by motivating states to enact laws that are optimal for shareholders and that minimize managerial … Read more
In the last two decades, anti-corruption has become a global norm, as the OECD and the United Nations have made clear in adopting anti-corruption conventions. As a result, combatting corruption in international business has joined upholding human and labor rights and protecting the environment as major aims of corporate social responsibility. Currently, however, anti-corruption responsibilities only require corporations to think about avoiding direct involvement in a corrupt transaction. In an article forthcoming in the Wisconsin Law Review, I argue that corporations’ responsibility to combat corruption extends beyond a duty to avoid paying bribes and requires corporations to fight corruption … Read more
The Office of the Comptroller of the Currency (OCC) recently took an enforcement action in the form of a consent order against a bank director that serves as a cautionary tale for the banking industry. The consent order, agreed to by and between the OCC and a director and former senior vice president of a small national bank in Wisconsin, reminds bank boards of directors of their fiduciary duties with respect to executive compensation and the consequences of breaching those duties. In particular, this action puts board compensation committee members on notice that they may be found liable for unsafe … Read more
Corporate law and governance are complex and continually changing. Yet, broadly speaking, throughout the 20th century corporate law developed with a focus on the allocation of power between shareholders and boards of directors. And, notwithstanding significant ambiguity and dissent, the dominant view that has emerged and remained relatively stable sees corporate law in predominantly economic terms and, specifically, as focused on shareholder value.
At the beginning of the 21st century, legal developments at the federal and state level have arisen that diverge from a narrow view of corporate law as serving primarily or only to order private financial interests. … Read more
As organizations continue to evolve and grow, so too does the role of the general counsel. Recent, diverse developments underscore how general counsel are no longer just corporate lawyers but also essential executive officers.
These developments include the emergence and authority of new, non-traditional executive officer positions. Also new is the willingness of the chief executive officer to take public positions on social issues, and to participate in social media. In addition, new proposals to repeal the Sarbanes Oxley Act are prompting a reaffirmation of principles of corporate responsibility, and the lawyer’s relationship to corporate governance.
With respect to each … Read more
Companies that go public with multiple classes of shares will be excluded from the major U.S. stock indexes of S&P Dow Jones Indices, the organization announced in July. A few days earlier, FTSE Russell said it would bar dual-class companies from its indexes unless public shareholders hold at least 5 percent of the voting rights. These policy changes were made in response to a recent surge in dual-class initial public offerings, which generated hostile reactions from investors, regulators, and the public. Such structures were historically favored by family-owned companies seeking to preserve control but have gained popularity among successful technology … Read more