Corporate Governance and Crowdfunding

In a recent paper, we focus on the expected agency problems in equity crowdfunding markets and the governance mechanisms that might mitigate them.

In equity crowdfunding, there are two pronounced problems that result from significant information asymmetry associated with small firms and their investors. The first involves adverse selection, which posits that the pool of firms seeking to raise capital in equity crowdfunding may not have as high expected (risk-adjusted) returns as does the pool of firms trying to raise capital outside of equity crowdfunding. In the absence of prospectus requirements, it is very hard for a large number … Read more

Do Boards Have Style? Evidence from Director Style Divergence and Board Turnover

A board of directors performs essential strategic and oversight roles that maximize the value of the shareholders’ residual claim. However, despite careful selection of board members, too often boards neither reach their full potential nor perform their necessary governance obligations. The role of structural characteristics such as firm size and composition have been thoroughly explored. However, evidence tying traditional board variables to board and firm performance remains contradictory or incomplete. As a result, there has been an increasing interest in the role of behavioral and cognitive traits to explain how organizations work. Beginning with the seminal work of Bertrand and … Read more

Can Corporate Governance Be Commoditized?

Shared series trusts – an entity structure of recent vintage used in organizing mutual funds or exchange traded funds – are a strange species in the world of business entities.  Simply put, such entities are designed to provide governance in a commoditized form.  Essentially, the structure permits a participating business to outsource governance issues by assigning governance of the business to an “off-the-rack,” or, more precisely, “ready-to-serve,” board of directors. This type of arrangement would be counterintuitive for most corporate law scholars since the board typically occupies a position of primacy in the affairs of any business[1] (i.e., governance … Read more

The Neglected Role of Justification Under Conditions of Uncertainty

A hot topic in corporate governance is the so-called short-termism of publicly held companies. In response to actual and anticipated pressure from activist hedge funds, companies are, some say, focusing too much on short-term gains by, for instance, shunning research and development. This behavior undermines long-term value at the expense of shareholders and society, the argument goes. The opposing view is that the pressure to perform is necessary to keep management on its toes. Both camps seem to have a point.

In our recent paper, we argue that  whether short-termism is a problem in general is impossible to determine. … Read more

How to Enhance the Value of Shareholder Voting Recommendations

In a new article, I discuss how investment advisers like Blackrock, State Street, and Vanguard, can become adequately informed prior to voting their proxies without having to read massive amounts of information about the hundreds or thousands of companies they manage for their clients. The issue has major significance for corporate governance because investment advisers to mutual funds, exchange-traded funds, and professional money managers of separately managed accounts are typically delegated the authority to vote their clients’ securities.  Most commonly, these voting rights are associated with a company’s common stock.  Investment advisers manage well over 30 percent of all Read more

Top Executives’ Compensation and Firm Survival

Executive compensation elicits strong opinions from shareholders, practitioners, and the public alike. Ideally, compensation packages should be designed to attract, retain, and motivate executives to perform in accordance with the objectives of their companies’ shareholders. This idea is consistent with the optimal contracting view of pay that high remuneration reflects compensation of effort, risk, or returns to ability (Murphy and Zabojnik, 2004). However, critics of executive compensation often claim that corporate pay packages have grown increasingly complex and are not sufficiently tied to long-term performance. According to this view, the level and complexity in the structure of CEO pay is … Read more

The Social Costs of Dividends and Share Repurchases

On December 9, 2002, UAL Corporation, which operated as United Airlines, filed for bankruptcy protection, leading to huge losses by UAL’s creditors. Those creditors included UAL’s pensioners when UAL’s pension plans were terminated and taken over by the Pension Benefit Guaranty Corporation, which guarantees a much lower level of benefits than United had agreed to pay. Yet in the five years before the bankruptcy, UAL paid out more than $1.2 billion to shareholders in dividends and share buybacks.  The shareholders kept that money despite the losses to others.

A long-held view in the academy is that shareholders are “residual claimants” … Read more

ISS Takes an Early Look at 2019 Shareholder Proposals

In the U.S., shareholder proposal filings have historically played an important role in advancing corporate governance and in highlighting key risks related to environmental and social issues. Some of the major shifts in governance practices during the past two decades – including the annual elections of directors, the adoption of majority vote standard for director elections, and the adoption of proxy access among large firms – were largely prompted by shareholder resolution campaigns. Shareholder proposals have also served as a driving force for greater corporate awareness of environmental and social risks, such as climate change risk management, diversity and inclusion … Read more

Outside Directors at Early-Stage Startups

There is substantial debate about the role of outside (i.e., non-employee) directors in enhancing corporate governance. Most of the research on this topic has focused on public corporations, which are required by law to have adequate representation of outside directors on their boards. Yet we have a limited understanding of how firms build their boards over time before they become public. In our paper, Outside Directors at Early-Stage Startups, we examine startup firms at the series A stage (“early-stage” startups) to answer some fundamental questions about outside directors: Why and when do startups hire outside directors? What type of … Read more

ISS Discusses Corporate Governance in Emerging Markets

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

Sullivan & Cromwell Discusses SEC Guidance on Director Diversity Disclosure

On February 6, 2019, the Securities and Exchange Commission’s Division of Corporation Finance released Compliance and Disclosure Interpretations 116.11 and 133.11, which address the disclosure of self-identified diversity characteristics with respect to board members and nominees under Items 401 and 407 of Regulation S-K. The C&DIs provide that to the extent a reporting company’s board nominating committee considers self-identified diversity characteristics (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background), the SEC would expect the company’s disclosure to include identifying those characteristics and how they were considered.


Item 401(e) requires a description of the specific … Read more

Rising Executive Pay Tied to Uncertainty of Joining New Firms

Everyone knows executive pay is rising. None of us can agree about why. Our forthcoming study in The Accounting Review, “Matching Premiums in the Executive Labor Market,” points to one reason—executives are being compensated for the risk they bear when leaving one firm for another. A company that wants to lure someone from another firm needs to bump up her compensation, as she’ll want a wage premium for sacrificing the comfortable fit with the current employer for the uncertainty of life at a new firm. This risk may be shared by both the company and the executive, but the … Read more

Debevoise & Plimpton Discusses UK Financial Conduct Authority’s Proposal for Heads of Legal

In a long-awaited but widely-expected development, the UK Financial Conduct Authority (“FCA”) has issued a new consultation paper[1] proposing that Heads of Legal do not need to be designated as Senior Managers under the Senior Managers Regime (“SMR”). Ever since the introduction of SMR in 2016, the FCA has delayed formally confirming whether heads of legal should be allocated the SMF18 role (Other Overall Responsibility Function).

The FCA came to its position in light of the potential difficulties created by legal professional privilege. A fundamental principle of the SMR is that if a firm breaches a FCA requirement, the … Read more

Does Corporate Social Responsibility Reduce Profit Shifting?

In recent decades, economies have become bound together through globalization, a phenomenon that integrates societies and creates business opportunities but also challenges tax policies. The amount of taxes corporations pay is a heatedly debated topic among policy makers, academics, and the media. An article in the Financial Times (Toplensky, 2018), for example, argues that multinational enterprises (MNEs) are paying significantly lower taxes now than they did prior the financial crisis. An important way MNEs reduce their taxes is to move profits from the countries where they’re based to countries where tax rates are lower, a practice commonly referred to as … Read more

Wachtell Lipton Discusses Capitalism at an Inflection Point

Dissatisfaction with corporations is near the top of the political agenda for both the left and for the right.

The Accountable Capitalism Act, a bill that would make all corporations with $1 billion or more of annual revenue subject to a federal corporate governance regime (by requiring them to be chartered as a United States corporation), was introduced this past August by Senator Elizabeth Warren.  Among other things, this regime would mandate that not less than 40% of the directors of a United States corporation be elected by employees, and that directors must consider the interests of all corporate stakeholders—including … Read more

How Better Corporate Governance Fosters Disruptive Innovation Through Executive Compensation

Innovation is the primary engine of growth in economies at the technological frontier, and a path to higher profits and growth for individual companies, as the likes of Apple, Alphabet, Microsoft, and Amazon make clear. CEOs play a crucial role in directing and overseeing their firms’ innovation efforts. This, however, creates a tension: The interests of the shareholders and the CEO might not be aligned, opening the door to agency frictions. In turn, such frictions can result in suboptimal investment in innovation, leading to losses in firm value for shareholders and low economic growth and welfare for the broader economy.… Read more

ISS Discusses Role of Shareholder Proposals in Shaping U.S. Governance Practices

Over the past three decades, shareholder proposals have transformed the corporate landscape in the U.S. by spurring the adoption of governance best practices. Annual director elections, majority vote rules for director elections, shareholder approval for poison pills, and proxy access bylaws are some of the critical governance practices that have become common practice thanks to investor support for shareholder proposal campaigns led by a wide variety of investors—some large; others small. Despite the advisory (non-binding) nature of most shareholder proposals in the U.S., successive waves of campaigns eroded boardroom entrenchment by convincing directors to respond to shareholders’ calls for accountability, … Read more

Debevoise & Plimpton Discusses SEC’s Nissan Inquiry and Non-U.S. Issuers of ADRs

It was reported on January 27 that Nissan Motor Co., Ltd. (“Nissan”) had received an inquiry from the United States Securities and Exchange Commission (the “SEC”), regarding alleged disclosure violations involving payments to its former Chairman, Carlos Ghosn. The reported inquiry is an unusual instance where the SEC has opened an inquiry into possible disclosure violations of a company without securities listed in the United States. Nissan has Level I American Depositary Receipts (“ADRs”) traded over-the-counter in the United States, but is not listed there and thus is not subject to U.S. reporting and record keeping requirements.[1]

The announcement … Read more

The Faulty Governance of Ring-Fenced Banks in the UK

A key policy of UK financial regulation since the financial crisis has been the ring-fencing of retail banks into separate and independently operated entities, so-called “ring-fenced bodies” (RFBs), distinct from entities that carry on other, and especially investment, banking activities within the same corporate group. Such structural regulation of the banking sector – which went into effect on January 1, 2019, for all UK banks with more than £25 billion of retail deposits  – was introduced to ensure that retail banks were less likely to fail. Proponents of ring-fencing argue that it does so in at least three ways. First, … Read more

The Case for Dual Class Shares

In recent times, the simmering feud between the church of the one share-one-vote and the heretic believers in shares with unequal voting rights has boiled over, particularly in the U.S.

The arguments pro and con this type of capital structure are numerous and in some ways compelling. Thus, on the one hand, the increased activism of funds (including activist hedge funds) pushing and shoving boards and management of companies to boost share price or sell the business prematurely has reinforced the determination of entrepreneurs to insulate themselves against such pressures by adopting a dual class of shares at IPO time … Read more