Corporate Governance and Countervailing Power

The analysis of corporate governance has been a strikingly one-sided affair.  The focus has been almost exclusively on “internal” checks and balances, namely scrutiny of executives by the board of directors and by shareholders.  In contrast, mechanisms that can operate as significant “external” checks on managerial discretion have been largely ignored. My recent paper, “Corporate Governance and Countervailing Power,” functions as a corrective to the prevailing trend.  The paper focuses on three historically important examples of external constraints on managerial discretion, namely state regulation of corporate activity, competitive pressure from rival firms, and organized labor.  A unifying feature … Read more

Sullivan & Cromwell Discusses SEC’s Withdrawal of Proxy Advisory Guidance

On September 13, the SEC’s Division of Investment Management withdrew two interpretive letters issued in 2004 to Egan-Jones Proxy Services (“Egan-Jones”) and Institutional Shareholder Services, Inc. (“ISS”). The letters described some of the guidelines under which an investment adviser could rely on a proxy advisory firm as an independent third party for purposes of making proxy voting recommendations.  In particular, the letters focused on the steps an investment adviser should take to ensure that voting recommendations were made in an impartial manner and that the proxy advisory firm’s potential conflicts of interest were addressed.  The SEC staff stated that it … Read more

Say-on-Pay Voting and CEO Compensation Structure

Since the financial crisis, much of the business  media have focused on the level of CEO compensation and how much it increases from the prior year, often calling out the CEOs with the highest pay. These articles in the New York Times and Fortune are good examples. Concerns about pay levels provided at least some of the impetus for the adoption of mandatory but non-binding say-on-pay voting in the United States, beginning at 2011 annual meetings for large public companies. These say-on-pay votes allow investors to express their opinions about a company’s executive compensation. Prior research supports the idea that … Read more

How Succession-Induced Gaps in CEO Characteristics Affect Firm Performance

Growing evidence that the personal characteristics of CEOs affect firm policy choices and performance prompts us to investigate the implications of CEO turnover for the value of a company. In a recent paper, we examine whether CEO succession gaps (i.e., the difference in characteristics between predecessor and successor CEO) have any influence on firm performance.

A change at the top is often considered good for a company, but evidence suggests that under certain conditions continuity is advisable. To address this, we seek to identify the characteristics of succession events involving CEOs with radically different personal traits that could harm firm … Read more

Making Sustainability Disclosure Sustainable

Issuers, investors, and regulators are paying increasing attention to corporate sustainability.  Commentators have proffered a variety of explanations for this attention ranging from the argument that corporations are morally obligated to act in a socially responsible manner to the claim that sustainability is linked to economic performance.  Responding to the demand for sustainability information, issuers are producing hundreds of pages of sustainability reports, and the number of intermediaries that have developed reporting standards and sustainability rating systems has proliferated.  The range of approaches to disclosure, however, limit the comparability and reliability of the information disclosed, and investors repeatedly express dissatisfaction … Read more

Comparative Corporate Governance

By adopting a systematic cross-national comparative approach, my recent study provides an overview of corporate governance (CG) around the world. It takes stock of what we know about the two main CG models, the variations within and across these models, as well as the worldwide diffusion and possible convergence of CG practices.

Although there is a range of different regimes of CG in advanced economies, the literature on comparative CG focuses on two: the shareholder-oriented model (prevailing in Anglo-Saxon countries) and the stakeholder-oriented model (prevailing in Germany, Japan, and continental Europe, Aguilera & Jackson, 2003). While the former prioritizes a … Read more

The Subversion of Shareholder Democracy and the Rise of Hedge-Fund Activism

Hedge fund activists are technically just minority shareholders, yet they exert enormous influence, often forcing companies to undertake fundamental restructuring and substantially increase stock buybacks and dividends. For instance, Third Point Management and Trian Fund Management, holding only 2 percent of the outstanding stock of Dow Chemical and DuPont, respectively, engineered a merger-and-split of America’s top two chemical giants at the end of 2015 that resulted in massive layoffs and the closure of DuPont’s central research lab, one of the first industrial science labs in the United States. How did hedge-fund activists gain such power?

In the 1980s, predatory value … Read more

Corporate Governance Reform in Post-Crisis Financial Firms: Two Fundamental Tensions

The manner in which financial firms are governed directly affects the stability and sustainability of both the financial sector and the “real” economy, as the financial crisis and associated regulatory reform efforts have tragically demonstrated.  However, two fundamental tensions continue to complicate efforts to reform corporate governance in post-crisis financial firms.

The first relates to reliance on increased equity capital as a buffer against shocks and a means of limiting leverage.  The tension here arises from the fact that no corporate constituency desires risk more than equity does—and that risk preference only tends to be stronger in banks, and at … Read more

Why Firms Disclose a Supplemental CEO-to-Median Worker Pay Ratio

Pay disparity between executives and employees has been criticized as evidence of corporate greed. It can also create perceptions of unfairness and dissatisfaction among employees, weakening their commitment and performance. To provide more information about pay disparity, the U.S. Congress enacted Section 953 (b) of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires all publicly listed firms to disclose a Pay Ratio comparing annual CEO compensation with median annual employee compensation, excluding the CEO. Proponents of Section 953 (b) assert that the information helps investors understand and evaluate CEO compensation within a specific firm. However, critics … Read more

Introducing the Totally Unnecessary Benefit LLC

The rapid proliferation of state statutes authorizing so-called “benefit” corporations—starting with Maryland in 2010 and spreading to over 30 states by 2018—has been premised in large part on the assertion that conventional corporate law mandates shareholder primacy. Under this legal mandate, the board of directors of a for-profit corporation must manage the business solely for the benefit of its shareholders. With the aim of maximizing shareholder wealth as a board’s singular focus, concerns for other, non-shareholding stakeholders, the public, and the environment are irrelevant except to the extent such concerns implicate the corporation’s profits.

Citing conventional corporate law’s mandate of … Read more

Corporate Governance—The New Paradigm—A Better Way Than Federalization

While “The Accountable Capitalism Act” introduced on August 15 by Senator Elizabeth Warren contains several very worthwhile provisions, it is premised on the federalization of all public corporations with revenues in excess of $1 billion. Mandatory federal incorporation and the creation of a federal office to make regulations and supervise compliance would be a major incursion into state corporation law. It is reminiscent of proposals by Ralph Nader some half-century ago to achieve control of major corporations by mandatory federal incorporation. Warren’s proposal should not receive any more support than Nader’s. However, like Nader’s proposal led to significant changes in … Read more

Cahill Discusses Amendments to Delaware Limited Liability Company Act

Amendments to the Delaware Limited Liability Company Act (the “DLLCA”) previously introduced in April 2018 were signed into law on July 24, 2018[1]. The amendments enable a Delaware limited liability company (an “LLC”) to engage in several new forms of transactions including: the (1) division of an LLC into two or more separate LLCs, (2) formation of registered series of LLCs and statutory public benefit LLCs and (3) use of blockchain technology for maintenance of LLC records and for electronic transmissions.

I. Division of LLCs


Effective August 1, 2018, an LLC may divide itself, and its assets … Read more

How Creditors Affect Corporate Governance

Though the majority of studies in corporate governance focus on the ability of shareholders to advise and monitor firms, debt financing is much more common than equity financing. According to the Thomas Reuters Loan Pricing Corporation, $2 trillion in syndicated loans were issued in 2016, compared with less than $250 billion in net equity. Further, the number of firms issuing debt is a multiple of those issuing public equity. If, as Shleifer and Vishny (1997) argue, “corporate governance deals with the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment,” then … Read more

Are Independent Board Members Necessarily Credible?

By the late 2000s, independent directors were in the majority on the boards of almost every type of U.S. organization. While this achievement may have improved corporate governance, it was not the panacea that some had anticipated, as subsequent events like the financial crisis of 2008 brought down even some of the best governed corporations.

The tragic fate of Lehman Brothers, which declared bankruptcy on September 15, 2008, the triggering event of the financial crisis, illustrates the limitations of independent board members. Lehman’s board of directors, typical for the time, was made up of independent people, many of whom were … Read more

Wachtell Lipton Discusses Gender Diversity and Board Quotas

California has made headlines this summer with legislative action toward instituting gender quotas for boards of directors of public companies headquartered in the state.  The legislation has passed the state senate; to be enacted, it must be passed by the California state assembly and signed by the governor.  In 2013, California became the first state to pass a precatory resolution promoting gender diversity on public company boards, and five other states have since followed suit.  The current legislative effort has come under criticism for a variety of reasons, and, while it is not certain to become law, it could be … Read more

How Stock Buybacks Can Affect Executive Compensation

The efforts by boards of directors to increase shareholder value often include buying back company stock. A stock buyback (“Stock Buyback” or “Buyback”) is the purchase by a company of its own stock, either on the open market or directly from its shareholders. A Buyback is also known as a “share buyback” or “stock repurchase.” Similar to a dividend, a Buyback is a way to return capital to shareholders. While a dividend is effectively a cash bonus amounting to a percentage of a shareholder’s total stock value, however, a stock buyback requires the shareholder to surrender stock to the company … Read more

How Corporate Governance Affects Mimicking Peers’ Financial Decisions

Traditional explanations for why companies choose certain financial policies focus on firm-specific factors. For instance, all else being equal, firms with higher tax rates are likely to favor debt financing over equity financing, given the tax advantages of debt. However, growing evidence suggests that firms also take cues from their peers in selecting financial policies. Yet, it is unclear whether this approach is consistent with maximizing shareholder interests.

In a recent study, we examine the impact of firms’ external corporate governance environments on the propensity of firms to mimic their industry peers in the selection of financial policies. Managers of … Read more

How Equitable Pay Can Affect Firm Performance

Much of the discourse on income inequality between ordinary workers and top executives concentrates on a ratio of chief executive officer (CEO) compensation to average employee compensation. The business strategy, organizational structure, and size of a firm can influence the numerator and denominator of this ratio, leading to misinterpretations of a firm’s level of income inequality.

Absent from the income inequality debate is the link between compensation and level of responsibility. Generally, managers earn more than their direct subordinates, and promotions with an increase in responsibility come with a corresponding increase in compensation. The firm’s underlying compensation system dictates the … Read more

Wachtell Lipton Discusses UK Corporate Governance Code

The Financial Reporting Council on July 16 issued a revised corporate governance code and announced that a revised investor stewardship code will be issued before year-end. The code and related materials are available at

The revised code contains two provisions that will be of great interest. They will undoubtedly be relied upon in efforts to update the various U.S. corporate governance codes. They will also be used to further the efforts to expand the sustainability and stakeholder concerns of U.S. boards.

First, the introduction to the code makes note that shareholder primacy needs to be moderated and that … Read more

Where the Fisch, Hamdani, and Davidoff Solomon Theory of Passive Investors Goes Awry

President Reagan once said, “I’ve heard that hard work never killed anyone, but I say why take the chance?”  In a recent paper, professors Jill Fisch, Assaf Hamdani, and Steven Davidoff Solomon (hereafter “FHDS”) argue that passive investors – the big index funds that many of us invest with – have no choice but to work hard. FHDS argue that passive funds must compete with active funds for investors by engaging with portfolio companies, and, most importantly, that this engagement is designed to improve the performance of their passive funds. As FHDS put it, “Our fundamental insight is that … Read more