Wachtell Lipton Discusses 2020 Voting Policies from ISS and Glass Lewis

Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis recently announced updates to their U.S. proxy voting policies for the 2020 proxy season. ISS’s new policies will apply to shareholder meetings held on or after February 1, 2020 and Glass Lewis’s new policies will apply to meetings that are held on or after January 1, 2020.

ISS Benchmark Policy Changes. ISS had previously released draft proposals on several of the proposed changes in October. Changes to non-U.S. voting policies covering Europe, the Middle East and Africa, and Asia have also been announced. Notable updates to ISS’s U.S. voting … Read more

Trading and Shareholder Voting

Recent regulatory reforms in advanced economies have empowered shareholders by letting them vote on executive compensation, corporate transactions, changes to the corporate charter, and social and environmental proposals. This shift of power from boards to shareholders assumes that shareholder voting increases welfare and firm valuations. It applies the logic of political democracy and takes for granted that aligning the preferences of those who make decisions with those for whom decisions are made – a form of corporate democracy – is optimal.

In our paper, Trading and Shareholder Voting, we question this argument. The corporate setting is very different from … Read more

Wachtell Lipton Discusses Shareholder Activism in France as Model for U.S.

In response to the sharp increase in campaigns by activist hedge funds in France and Europe generally, a French commission has conducted an extensive investigation and issued a carefully researched, reasonable and balanced report recommending regulatory and procedural changes to rebalance the relationship between companies and activists.  The key recommendations are:

  1. “[S]tronger transparency measures applicable to investors taking public positions, directly or indirectly, aimed at influencing an issuer’s strategy, financial position or governance.  An activist taking a public position should disclose, inter alia, the number of shares and voting rights and the type of securities held in the issuer,

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Leo Strine’s Corporate Decline Problem

Leo E. Strine, Jr. has long had a bully pulpit in corporate law, first on Delaware’s Court of Chancery and then as chief justice of the Delaware Supreme Court.  Bully pulpits are good things for the occupants but can be a bit infuriating for those in the congregation. Such is the case with Chief Justice Strine’s recent article, “Toward Fair and Sustainable Capitalism.”[1]

Strine argues that companies are too beholden to stock markets, fail to make long-term investments, and fail to share gains between shareholders and workers. He provides a list of proposals that are fairly characterized as arguing … Read more

The Case for Institutional Investors’ Collective Engagements

Shareholder cooperation is on the rise as a tool for active corporate ownership and a way to effectively voice concerns about corporate governance and performance. While “wolf packs” of activist hedge funds that aim to bring about significant corporate change at targeted companies have attracted the most attention, there are other forms of shareholder coordination that are not activist-driven.

One is collective engagement by institutional investors guided by the recommendations in stewardship principles adopted in several countries. Over the last few years, representative organizations such as, to some extent, the Council of Institutional Investors (CII) in the U.S. and, to … Read more

How Elizabeth Warren Is Reviving the Concession Theory of the Corporation

There are three main theories of the corporation as a legal entity: the concession theory, the real entity theory, and the aggregate (contractarian) theory.[1] Once the most prominent of the three, the concession theory fell out of favor long ago but seems to be making a comeback, due in large part to Senator Elizabeth Warren and her Accountable Capitalism Act (the “ACA”).

The Rise and Fall of the Concession Theory

The concession theory holds that corporate personhood and associated privileges are granted to corporations by the state where they are incorporated. In other words, the theory posits that it … Read more

Do Long-Term Institutional Investors Promote CSR Activities?

Institutional investors have in recent years become the largest equity holders in the U.S., owning about 80 percent of the market value of S&P 500 index stocks and more than 70 percent  of the shares of the 10 largest U.S. firms (Mcgrath, 2017). As a result, institutional investors’ power and influence on corporate decision-making have grown,  increasing concerns about whether they actively monitor firms and exercise stewardship to enhance firms’ long-term sustainable value.

Do institutional investors act in short-sited ways, interested mainly in boosting short-term share prices, or do they encourage management to invest for the long-term? The answer, and … Read more

Wachtell Lipton Discusses Stakeholder Governance: Issues and Answers

The Business Roundtable’s recent call for a commitment to long-term sustainable economic value creation has prompted a vigorous debate about the optimal corporate governance model for achieving that goal.

Certain familiar arguments have reappeared in reaction to the Business Roundtable’s important statement rejecting shareholder primacy and embracing stakeholder governance.  Various law firms and commentators insist that such innovation in corporate governance is constrained by an imperative to maximize shareholder value—the ideology that a corporation can have no purpose other than profit maximization for shareholder gain.  Others assert that the path to effective governance reform lies with prescriptive regulation, presumptively by … Read more

Shareholder Primacy Isn’t the Best of All Possible Worlds

In a recent opinion piece in the Financial Times[1], Harvard Law School Professor Jesse Fried makes a strong case that the Business Roundtable’s CEOs statement, in which they committed to “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders,” by itself will not affect how CEOs run their companies. This is surely correct. But he overstates his case by treating the current “shareholder primacy” system of corporate governance as both the historical norm and the ideal system.

Fried bases his argument for shareholder primacy on the binding contractual nature of corporate … Read more

On an Expansive Definition of Shareholder Value in the Boardroom

Directors of a Delaware corporation must act in the best interest of the corporation and its shareholders.[1]  Other stakeholders – such as employees, creditors, customers, and suppliers – may only be considered by directors to the extent there are rationally related benefits to the welfare of shareholders.  The preceding two tenets of Delaware law may on occasion appear to pose challenges to a corporate board considering an environmental or social[2] initiative that cannot readily be supported by traditional metrics of long-term financial value for shareholders.  However, I submit that boards have the discretion to take an expansive … Read more

Richards Kibbe & Orbe Discusses Delaware Rulings on Boards’ Duty of Oversight

Earlier this month, the Delaware Court of Chancery denied defendant directors’ motion to dismiss a duty-of-oversight claim brought by plaintiff shareholders in In re Clovis Oncology, Inc. Derivative Litigation.[1]  This decision, together with a similar June 2019 ruling by the Delaware Supreme Court in Marchand v. Barnhill[2], confirms the prospect of liability for corporate directors who do not work hard enough to establish and monitor effective risk-management procedures at their companies.  The two rulings therefore deliver timely lessons regarding directors’ duty of oversight under Delaware’s Caremark standard.  The rulings are especially important for directors of companies whose … Read more

Entrenchment Through Discretion over M&A Contractual Provisions

Managerial entrenchment is detrimental to shareholder value (Faleye (2007), Cohen and Wang (2013), and Cohen and Wang (2017)). Managers are able to become entrenched by making specific investments whose value is higher under their watch than under that of the next-best alternative managers (Shleifer and Vishny (1989)). This value differential will be lost if shareholders replace managers who entered into such deals. As a result, those managers gain leeway to increase their compensation and exercise more discretion over firm strategy in a way that might destroy shareholder value.

In a recent article, we explore how managers who are not yet … Read more

The Valuation and Governance Bubbles of Silicon Valley

The rise and fall of The We Company IPO bubble is one of those events that, like the subprime mortgage bubble that preceded the financial crisis, calls for an examination of market structures that could have produced such a precipitous turnabout.  Indeed, the two bubbles share similar features, namely, structural features that favor the expression of positive sentiments and make it difficult to express negative sentiments.  We call this “one-sided market sentiment.”

Some of the most famous moments of the financial crisis, memorialized in print and film, turned on how intrepid traders determined that impenetrably complex mortgage-backed securities were overvalued … Read more

ISS Offers 2019 Overview of Virtual Shareholder Meetings in the U.S.

Key Findings

  • While overall the share of virtual annual meetings among Russell 3000 firms has increased to 7.7 percent, the number of new adopters has decreased in each of the last two years.
  • There does not seem to be a link between governance structure and company meeting format. Companies with virtual meetings appear no more likely to have poor governance provisions.
  • Similarly, the dissent levels on key voting items such as say-on-pay and director election appear to not vary materially for both physical and virtual meeting holders.
  • When adopting a new meeting format, companies and shareholders should evaluate key considerations

Read more

The Puzzling Case of the WeWork Non-IPO

The dramatic implosion of the IPO of The We Company, parent of office-sharing firm WeWork, (the “WeWork IPO) has attracted intense scrutiny across the business community.  For scholars and practitioners who work at the intersection of law, business, and technology, the sequence of events leading to that implosion raises fascinating and interrelated questions involving corporate governance, the relationship between public markets and private markets, and platform economics.

Is corporate governance going downhill?

One of the most actively discussed topics in corporate governance is the increased use of multi-class stock structures in IPOs, especially in the case of firms in digital … Read more

The Shareholder’s Dilemma

Theoretical and empirical research on shareholder voting has provided many exciting insights and guidance for debates on policy and regulation. The default assumption, though, is that shareholders have strong incentives to vote for alternatives that they think are best for the firm.   In our paper, available here, we show that, when shareholders have the opportunity to buy or sell shares after voting, there can be strong incentives to vote against the firm’s interest. The presence of this incentive confounds the potential for shareholder voting to aggregate information and serve as a check on management.

We develop a game-theoretic model … Read more

A Corporation’s Culture Will Dictate Its Fortunes

How direct is the link between corporate culture and a corporation’s fortunes?  A founder of five successful tech companies recently offered a clue when asked about what he would do differently as a founder and CEO:

“Many things, but I guess one thing that comes to mind is to realize earlier the importance of culture.  I discovered this through a spectacular hiring miss at my first company. The company was scaling up and getting its first real growth. I had previously been able to hire people informally. But for this hire, we did a nationwide search, and after interviewing 30 … Read more

Information, Incentives, and CEO Replacement

The replacement of a CEO is one of the most important responsibilities of corporate boards. The most common theoretical underpinning of CEO replacement is related to CEO ability: The corporate board learns about the ability of its CEO from firm performance and other sources of information. If the board’s assessment of the CEO’s ability falls below, say, the expected ability of a replacement candidate, then the board may dismiss the CEO. More recent studies associate CEO replacement with firms’ strategy changes. The board looks for a new CEO either to change the strategic direction of the firm or to implement … Read more

ISS Offers 2019 Global Policy Survey Results

Key Findings

  • Board Gender Diversity: Majorities of both investors (61 percent) and non-investors (55 percent) agreed with the view that board gender diversity is an essential attribute of effective board governance regardless of the company or its market. Approximately 27 percent of investors tended to favor a market-by-market approach to reviewing board gender diversity, while 24 percent of non-investors tended to favor an analysis conducted at the company level.
  • Director Overboarding: Investors and non-investors diverged on the question of measurement of director overboarding. A plurality of investor respondents (42 percent) indicated four public-company boards as the appropriate maximum limit for

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