The Rise of Regulatory Affairs in Innovative Startups

A few years ago, signs of change started to appear in the startup world. Media headlines began reporting battles between regulators and Uber and Airbnb. Sharing economy companies faced worker classification issues, and fintech companies bumped up against securities regulation, lending laws, and licensing requirements. Former politicians and government aides joined startup boards. A top-tier venture capital firm created the first policy and regulatory affairs group to help its portfolio companies navigate laws affecting their businesses and foster contacts with policy makers, regulators, and investors.

In a forthcoming book chapter, available here, I describe the increasing importance of regulatory … Read more

How Sarbanes-Oxley Affects Board Changes and CEO Turnover

Following the corporate governance scandals of the early 2000s, the effectiveness of board monitoring came into question. In response, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) in an attempt to increase monitoring and improve corporate governance. In conjunction with SOX, exchange listing requirements required firms to have a majority of independent directors on their boards.  While firms that did not already have such a majority were forced to alter their board structures, SOX may also have prompted other firms to alter the composition of their boards.  In our recent paper, published in the Journal of Banking and Finance, … Read more

Wachtell Lipton Discusses the Classified Board Duels

Professor Lucian Bebchuk has engaged in two rounds of law-review-article duels with Professor Martijn Cremers and Professor Simone Sepe over classified boards. The weapons were statistics (and common sense). Cremers and Sepe wore the classified-board-stakeholder colors; Bebchuk, the agency-model-shareholder-democracy colors. Cremers’ and Sepe’s riposte was decisive.

The field for these duels was chosen by Bebchuk in 2011 when he chartered the Harvard Law School Shareholder Rights Project (the “Harvard Project”). Bebchuk described the Harvard Project as an academic program designed to “contribute to education, discourse, and research related to efforts by institutional investors to improve corporate governance arrangements at publicly … Read more

Mutual Fund Advisors’ “Empty Voting” Raises New Governance Issues

The creation of the mutual fund will go down as one of the greatest innovations in financial history. It has provided tens if not hundreds of millions of unsophisticated and uninformed stock market investors with easy access to low cost portfolio diversification. Moreover, for those investors who do not want to spend time and money searching for portfolio managers who can earn excess risk-adjusted returns, passively managed index funds provide tremendous value.

But mutual funds also have their downside. They generate what Ronald Gilson and Jeffrey Gordon would call the “agency costs of agency capitalism.” Mutual funds generate these costs … Read more

Board Declassification Activism: Why Run From the Evidence?

In a recently released study, we examined the value implications of board declassifications promoted by the Harvard Law School Shareholder Rights Project (“SRP study”). In a May 2017 note, Lucian Bebchuk and Alma Cohen “contest” the results in our study. In our reply, “Board Declassification Activism: Why Run Away from the Evidence?” we show that the Bebchuk-Cohen critique is not only unwarranted, but also fails to engage with our study’s central finding: that the declassification activism of the Shareholder Rights Project (“SRP”) was followed by substantial declines in firm value of from $90 billion to $149 billion.

For … Read more

Tournament-Based Incentives, Corporate Cash Holdings and the Value of Cash

In a new paper, we examine how tournament-based incentives affect corporate cash holdings and the value of those holdings for shareholders.

Before a firm selects a new CEO, it may run a tournament within the firm to rank its vice-presidents (VPs) as candidates. Because the actual ability of a VP is unobservable, the VP with the best performance relative to his peers will likely win the tournament. The payoff structure of tournament-based incentives is similar to that of stock options, in which the payoff is an increase in pay, perquisites, and prestige associated with being the CEO. This option-like feature … Read more

How Principles of Good Governance Can Improve Oversight of Financial Regulatory Institutions

Financial regulatory institutions are at the center of intense debates over how to supervise financial firms and markets. They are also the focus of an important and growing body of literature that is mainly concerned with the question, “Who should regulate the regulators.” Financial regulatory institutions are usually audited as part of the review of a particular country by international organizations such as the International Monetary Fund, the World Bank, or the OECD. In practice, this means that the structure of financial regulatory institutions and the conduct of financial regulators are not regularly and consistently monitored.

In our recent … Read more

How Directors’ Foreign Board Experience Improves Governance

The corporate governance literature has shown a strong link between good governance practices and firm value. The mechanisms, however, that determine the choice of effective corporate governance and board arrangements in a changing global market are not well studied. In our new working paper “Governance Transfer Through Directors’ Foreign Board Experiences,” we examine one such potential mechanism—whether firms learn about corporate governance and board practices from their directors’ foreign board experiences.

Directors with international board experiences have access to a much larger and more diverse set of governance practices than directors who only sit on domestic firms’ boards. For example, … Read more

Corporate Governance as Moral Psychology

In this essay — prepared for a Washington & Lee symposium on corporate law, governance, and purpose — I propound a simple thesis: Corporate governance is best seen not as a subset of economics or even law, but instead as a subset of moral psychology.

Moral psychology:  instant, instinctive decision-making

Recent research in the nascent field of moral psychology suggests that we humans are not rational beings, particularly when we act in social and political settings. Our decisions on right and wrong (moral judgments) arise instantly and instinctively in our subconscious, out of conscious view. We rationalize these decisions — … Read more

The Duty of Care for Bank Directors and Officers

The 2008 financial crisis was catastrophic for the U.S. banking industry. Between 2007 and 2014, 510 banks failed. Another 700-plus banks received some type of federal monetary assistance. Unsurprisingly, this led to calls to hold bank directors and officers legally accountable for harm they may have caused.

One federal regulator with the power to hold directors and officers of failed banks financially responsible is the Federal Deposit Insurance Corporation (FDIC). The FDIC acts as a receiver for failed banks. It has authority to sue directors and officers for losses they caused to failed banks and has been aggressive in doing … Read more

Proxy Delivery Methods Show How Managers Rely on the Retail Shareholder Vote

Previous research on shareholder voting has placed most of the emphasis on the role of institutional shareholders. In our recent study, however, we provide evidence that managers strategically rely on the support offered by retail shareholders to ensure that their agenda passes and to communicate strong overall shareholder support during times of poor performance.

Our study is designed around the introduction of electronic proxy delivery. In 2007, the Securities and Exchange Commission (SEC) implemented rules allowing for electronic delivery of proxy materials. The revised system allows firms to choose between the traditional, mailed “full-set delivery” of proxy materials and the … Read more

SCOTUS Just Invented Unlikely Sentry Against Corporate Tax Inversions: Patent Trolls

Tax regulators and acquisition sponsors have long been embroiled in a cat and mouse game in the context of corporate inversions—cross-border transactions in which a U.S.-incorporated public corporation is “acquired” by a foreign entity, and the survivor’s locus of incorporation moved out of the United States. If done in compliance with applicable tax regulations, inversions typically allow American targets to avoid high U.S. corporate tax rates on worldwide income, and make use instead of far lower tax rates applied only to income generated within the survivor’s destination jurisdiction.

As tax inversions grew in popularity, federal authorities responded with a gauntlet … Read more

Delaware’s Long Silence on Corporate Officers

Delaware has reigned as the preeminent corporate law jurisdiction in the United States for over a century, weathering the rivalry of eager state competitors (such as Maryland and Nevada) and the looming presence of – and occasional intervention by – the federal government.  Various explanations have been provided as to why Delaware continues to dominate.  And various assessments have been offered as to whether, overall, Delaware’s corporate law jurisprudence is beneficial or detrimental for investors.  These explanations and assessments typically focus on what Delaware has done well over the years to retain its supremacy, not on what, deliberately or fortuitously, … Read more

How Tax Avoidance Affects Shareholder Value

In my recent paper, Tax Avoidance, Income Diversion, and Shareholder Value: Evidence from a Quasi-Natural Experiment, I examine how the interaction between the corporate tax system and corporate governance affects firm value. To this end, I empirically investigate two main questions. First, do investors value corporate tax avoidance? I find that, on average, they do. Second, does the corporate tax system (which includes both taxes and tax enforcement) affect the level of income diversion? I find that market reactions suggest that higher tax rates can erode good corporate governance  by increasing the return from income diversion, and that stricter … Read more

The Significance of Worker Voice in Business and Society

Time and time again, experience has shown how important it is, to business and society, for individuals to speak up when they encounter problems or wrongdoing in the workplace.  The scandal at WorldCom broke only after employees publicly blew the whistle on executives.[1]  An Enron employee reported problems to the IRS in 1999, long before the firm’s failure in 2001 and, some speculate, early enough to have allowed the firm to survive if the problems had been addressed.[2]  In the wake of scandal, Volkswagen offered internal immunity to employees who blew the whistle regarding cheating on emissions tests … Read more

Corporate Governance, Shareholder Proposals, and Engagement Between Managers and Owners

Tucked into the Financial Choice Act (FCA), the recent endeavor in the House of Representatives to overturn significant segments of the Dodd-Frank Act, was an entirely unrelated provision. Section 844 of the FCA proposed a number of changes to Rule 14a-8,[1] including tougher eligibility standards. To submit a proposal, shareholders would have to own at least 1 percent of a company’s outstanding voting shares continuously for three years.[2] Instead of holding around 15 shares of Apple for 12 months, the proposed standards would require something closer to 5 million shares for 36 months. Instead of acquiring $2000 worth … Read more

The Board, the General Counsel, and the Risk-Insensitive Executive

A significant emerging governance issue is how best to monitor – and influence – the management style of senior executives who by nature are insensitive to the risks of their initiatives. As recent controversies across multiple industry sectors confirm, such insensitivity can lead to extraordinary legal, accounting and reputational crises for the organization.

The issue extends beyond the chief executive officer to other senior officers (e.g., the chief operating officer, the chief financial officer, the chief information officer) with significant organizational portfolios and the authority to implement strategic initiatives. Their potential insensitivity to risk can similarly trigger enterprise-level concerns.

The … Read more

The Public Cost of Private Equity

Few areas of business stir up more controversy than private equity.  Critics slam private equity firms for destroying companies by layering on debt, firing employees, and cutting costs at every opportunity.   Proponents, on the other hand, respond that any changes they make to companies are painful but necessary to improve the inefficient companies that they acquire—and they dispute the charges about destroying jobs.

In The Public Cost of Private Equity, I explore a different, and potentially more worrisome, aspect of private equity: its corporate governance structure. While less visible to outside observers, corporate governance plays a critical role in … Read more

Principal Costs: A New Theory for Corporate Law and Governance

For the last 40 years, the problem of managerial agency costs—corporate managers shirking duties and diverting resources—has dominated the study of corporate law and governance. Many scholars treat the reduction of agency costs as the essential function of corporate law and governance. To reduce agency costs, these scholars would mandate corporate governance arrangements that empower shareholders to hold managers accountable, such as majority voting and proxy access. And they would ban arrangements that disempower shareholders, such as staggered boards and dual-class shares. Similarly, they support hostile takeovers and hedge fund activism to combat management entrenchment and reduce agency costs. To … Read more

Columbia Law Professors Write Three of Top 10 Corporate and Securities Articles

Merritt Fox, Zohar Goshen, and Eric Talley were among the authors of three of the 10 best corporate and securities articles last year, the Corporate Practice Commentator has announced. The Columbia Law School professors were joined by Gabriel Rauterberg, who was a research scholar at the school when he wrote one of the selected pieces with Fox and Lawrence Glosten, a professor at Columbia Business School.

The Corporate Practice Commentator’s Robert Thompson, a professor at Georgetown Law School, conducted the 23rd annual poll to compile the top-10 list. Teachers of corporate and securities law voted to select the best … Read more