Much of the public has long believed that executives are overcompensated, a sentiment that has occasionally crept into legislation. In one case, Congress voted to impose punitive excise taxes on managers who received excessive golden parachute payments. Unlike most taxes meant to influence corporate behavior, these taxes aim directly at the corporate decisionmaker who receives the payment, potentially leaving him worse off economically. To avoid that result, some compensation committees have structured managers’ compensation to include tax gross-ups: a payment of some portion of the manager’s personal tax liability, plus any tax on the compensation triggered by paying the liability … Read more
President Donald Trump’s campaign proposals included changes to tax rates and a promise to repeal the Dodd-Frank Act. If enacted, these proposals could have a significant impact on the way businesses handle executive compensation, permitting companies greater flexibility in structuring compensation arrangements. His staff also hinted at a reversal of Department of Labor (DOL) conflict of interest regulations. However, even if these proposals are enacted, some aspects of compensation programs that companies implemented to comply with current or, in the case of the DOL rules, anticipated requirements are likely here to stay given their popularity with institutional shareholders or due … Read more
In 2016, companies, governments, and consumers were again challenged to navigate an evolving landscape of cybersecurity and privacy issues. This year saw flash points impacting the trajectory for data breach litigation, the future for privacy class actions, and the scope of government powers to both regulate data collection practices and gather data itself. Cybersecurity also burst onto the international regulatory and political scene.
Among other developments, this year the Supreme Court issued its decision in Spokeo, Inc. v. Robins, a long-awaited development addressing (somewhat) plaintiffs’ burden to show concrete injury to satisfy Article III standing. Plaintiffs and defendants had … Read more
Multiple recent developments suggest that governing boards will continue to be called upon to address the personal liability concerns of corporate gatekeepers and other executives. There may be no clear indication yet of whether the Trump administration will endorse government individual accountability initiatives, such as the Yates Memorandum. But these new developments indicate that the “pipeline effect” of investigations commenced after the Yates memo was issued in September 2015 will be felt for the foreseeable future.
Such an effect will undoubtedly fuel the self-interest tendencies of many key corporate leaders. That, in turn, could enhance the potential for conflict between … Read more
A central goal of corporate law is to prevent managers from putting their own interests ahead of those of shareholders. Such self-serving behavior can take many forms, ranging from illegal self-dealing transactions to self-entrenchment in the face of hostile takeover attempts. Moreover, while the law may prohibit such conduct, the relevant norms are often notoriously vague and fact-intensive, which makes them difficult for courts to apply.
Against this background, high-quality courts should improve firm performance in at least two ways. First, such courts should make it easier to police transactions designed to transfer wealth from firms to managers. Second, by … Read more
This past year witnessed a number of new corporate governance initiatives. Among the most significant:
- BlackRock, State Street and Vanguard each issued strong statements supporting long-term investment, criticizing the short-termism afflicting corporate behavior and the national economy and rejecting financial engineering to create short-term profits at the expense of sustainable value.
- The Business Roundtable issued an updated version of its Principles of Corporate Governance.
- The International Business Council of the World Economic Forum issued The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth and over 100
The pressure to meet earnings expectations has grown intense for U.S. companies, and may be damaging the health and safety of workers. Missing analyst estimates, even by a small amount, can lead to significant negative reactions from investors. For example, eBay’s share price plunged 22 percent when it missed its fourth-quarter 2004 consensus estimate by just one penny. Facing such market pressures, managers may look for ways to improve their firm’s bottom line. They can create incentives for employees to become more productive, reduce discretionary expenditures, or seek ways to boost profits in the short term. These actions often come … Read more
Buried deep in Article I of the U.S. Constitution is an obscure provision known as the “Emoluments Clause.” In relevant part, it provides that:
“[N]o person holding any Office of Profit or Trust under them, shall, without the consent of the Congress, accept of any present, Emolument, Office or Title, of any kind whatever, from any King, Prince, or foreign State.”
Arguably, it was the first conflicts of interest prohibition in U.S. history, and its origins lie in a gift of a snuff box by the King of France to Benjamin Franklin, then our Ambassador to France, which gift … Read more
In 2016, enterprising software developers sought to create a business entity with a unique governance structure: a leaderless, decentralized venture capital firm that would allow investors to vote on and collectively fund proposals. The Distributed Autonomous Organization (DAO) attracted more capital than its backers had anticipated, becoming the largest crowdfunded project ever with $168 million raised. To participate, investors poured funds into ether, a digital currency designed to facilitate decentralized applications on Ethereum, which is an open source, blockchain-based computing platform. After acquiring ether, investors exchanged it for the DAO’s tokens, entitling them to participate in its governance, profits, and … Read more
On November 29, 2016, Prime Minister Theresa May’s government issued a green paper (the “Green Paper”) to canvass opinion on proposed reforms to the UK’s corporate governance framework.
A green paper is a government consultation document that invites feedback from interested parties (both within Parliament and outside it) on legislative proposals. The document does not form part of the legislative process and is non-binding in nature, and the government has stressed that it is not currently advocating any one proposal. Therefore, while the content of the Paper provides some guidance as to the government’s current thinking on … Read more
New York’s Department of Financial Services (DFS or the Department) has responded to a large volume of comments about its proposed, sweeping cybersecurity regulation for banks, insurers and other financial service providers by softening a number of provisions that many in the industry had criticized as onerous and overly prescriptive. On December 28, 2016, the Department published a revised regulation (the Revised Draft Regulation) that altered its original, “first-in-the-nation” proposal issued on September 13, 2016 (the Original Draft Regulation).
Many had argued that the Original Draft Regulation should be more risk-based, along the lines of the NIST Cybersecurity Framework … Read more
“Reputation matters” is by now almost a mantra. Scholars of commercial law increasingly refer to reputational concerns as important forces that shape our behavior – a “system of control” of sorts. The idea – backed by mounting empirical evidence – is that news about corporate misbehavior should bring with it declines in stock prices, in consumers’ willingness to pay, and in employee motivation. Companies and business people anticipate the risk of diminished future business opportunities, and it encourages them to avoid misbehaving, the argument goes. Yet so far the literature has stayed remarkably silent on how exactly reputation matters, or … Read more
On December 19, the Federal Reserve published a final rule[i] implementing public disclosure requirements for bank holding companies subject to the liquidity coverage ratio (the “LCR”)[ii] that will require them to publicly disclose quantitative and qualitative information regarding their respective LCR calculations on a quarterly basis. The final rule adopts the quantitative components of the LCR disclosure as proposed,[iii] but includes certain changes from and clarifications to the proposed rule with respect to the required qualitative disclosures that were suggested by industry commenters,[iv] including:
- clarifying that a covered company may, in determining which items
Over the last 30 years, institutional investors have dramatically increased their stakes in U.S. companies. In the 1980s, they held approximately 20 percent to 30 percent of the average firm in the U.S. By 2010, they held over 65 percent. This increase in institutional holdings coincides with the growing complexity of markets and importance of corporate governance. Prior research has focused on the different effects on firms of the informed “smart money” of the institutional investor in contrast to the less sophisticated individual “retail” investor. Yet, as SEC Commissioner Luis Aguilar said in a recent speech, “Institutional investors are not … Read more
Corporate governance has become even more important since the collapse of major firms in the 1990s and the global financial crisis of 2007-2008, and the relationship between financial reporting and the capital markets is a big reason why. The debate has continued over the unreliability of reported earnings as the magnitude and frequency of non-GAAP earnings, earnings restatements, earnings management, and fraud have grown. Additionally, major market players disagree about the value of corporate governance codes to U.S. firms.
In my recent article, “Corporate Governance and U.S. Firms over the Last Three Decades,” published in the Journal of Accounting, Ethics … Read more
Shareholder activism remains a major force in corporate decision-making in 2016 but is increasingly operating in an environment of robust, multi-faceted shareholder engagement, particularly at large companies. The time and effort that companies and institutional investors have spent developing a mutual understanding of eachother’s concerns have narrowed the opportunities for activists at high-profile companies, and the returns of activist funds overall are down in 2016. The total number of activist campaigns has nevertheless remained high, due in large part to newer and often smaller activists targeting small and mid-size companies.
Large institutional investors have long been an important constituency in … Read more
Why do some firms generate great wealth for investors and offer innovative solutions to problems, while seemingly similar firms are much less successful? Why do employees at some firms repeatedly act unethically, shocking their leaders with scandals, while seemingly similar employees at other firms are quick to blow the whistle on unethical actions? One answer might be corporate culture. While policymakers, executives, and the press often credit corporate culture with some of the greatest business successes and failures, there is limited large-scale evidence to support such arguments. In our recent article, “Corporate Culture: Evidence from the Field,” available here, … Read more
The Silicon Valley ecosystem has changed profoundly since the dizzying heights of the dot-com era. Consider two of that era’s iconic companies: Yahoo! and eBay. At the time of their IPOs, both of these companies were mere infants by today’s standards. Yahoo reported having 49 employees, net revenue of only $1.3 million, and a total market capitalization of about $400 million. eBay reported having 76 employees, annual net revenue of less than $20 million, and a market capitalization of approximately $700 million.
Google and Facebook ushered in a new era of mature startup. At the time of its 2004 IPO, … Read more
In September 2009, Bank of America CEO Ken Lewis suddenly announced his intention to retire by the end of the year. The company’s board was taken by surprise as it scrambled to find a successor and was further embarrassed as multiple candidates rebuffed the company’s approach. Several delays of self-imposed deadlines and rampant speculation that the company would be forced to choose a stopgap CEO followed. It was only days before Lewis’ departure that the board named Brian Moynihan as the new CEO. This incident highlights that most companies have long been complacent about succession planning. More than half of … Read more
The two most influential proxy advisory firms–Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis)–recently released their updated proxy voting guidelines for 2017. The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments. The 2017 ISS policy updates are available here. The 2017 Glass Lewis Guidelines are available here.
ISS 2017 Proxy Voting Policy Updates
On November 21, 2016, ISS released updated proxy voting policies for shareholder meetings held on … Read more