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
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 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
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
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. 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. In the wake of scandal, Volkswagen offered internal immunity to employees who blew the whistle regarding cheating on emissions tests … Read more
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, 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. 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
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
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
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
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
In our recent study, we find that institutional investors follow high-performing directors to new firms and make larger initial investments in those firms than in other firms. Fama (1980) and Fama and Jensen (1983) support our finding and propose that such directors are especially skilled at advising and monitoring their firms to ensure that shareholder interests are protected.
The notion that institutional investors might follow some directors also receives support from recent work that shows that some directors create more shareholder value than others (e.g., Masulis and Mobbs 2011; Masulis and Mobbs 2014). Anecdotal evidence suggests that large institutional investors … Read more
Corporate governance mechanisms that mitigate problems associated with the separation of ownership and control include board monitoring of managers, compensation incentives, a market for corporate control, and government regulation. Recently, shareholder activism has become an increasingly popular tool as well. Typically, activism involves a hedge fund or other institutional investor with an arm’s-length relationship to a firm acquiring a concentrated stake in that firm and prodding management to make value-enhancing changes. In our study, we find that individual investors who are at the periphery of control, such as founders and former executives, also launch activist campaigns, a phenomenon we term … Read more
Investor activism is an important mechanism by which a company’s shareholders can affect corporate decisionmaking. To legally compel corporate managers to change policies, activist investors must engage in proxy fights during which they solicit support for their proposals from other shareholders. Proxy fights involve significant costs and therefore are infrequent: 91 percent of the activist campaigns in our sample do not involve proxy fights. Given the infrequency of proxy fights, a natural intuition would be that target managers rarely concede to activist demands. However, we show that activist campaigns without proxy fights are surprisingly effective. This leads to an important … Read more
Insider trading law may be headed for even more disruption, as federal and state watchdogs press broad theories that include hacking and so-called Insider Trading 2.0, the early release of information for a fee, a panel of legal experts said on April 20.
Speaking at the M&A and Corporate Governance Conference in New York, the panel of lawyers and regulators tested the bounds of rules against insider trading in response to a series of hypotheticals posed by Professor John C. Coffee, Jr. of Columbia Law School. An attorney with the U.S. Securities and Exchange Commission said, for example, that the … Read more
Activist investors that believe an agency problem exists between shareholders and management may attempt a proxy contest aimed at specific issues or control of the board. Research shows that, in anticipation of a proxy contest, managers make significant adjustments in favor of shareholders on a wide array of corporate policies, including R&D expenditures, capital expenditures, leverage, dividends, management compensation, and CEO tenure. Furthermore, Brav, Jiang, Partnoy, and Thomas (2008) and Klein and Zur (2009) document that activist hedge funds often use a proxy threat to get what they want from incumbent managers. From this perspective, the threat of a proxy … Read more
We examine the relations among various types of family firms, including those named after their founders (founder-named, or FN, firms), those managed by their founders (founder-managed, or FM, firms), and those named after and managed by their founders (founder-named-and-managed, or FN&M, firms). Our empirical results establish a strong and consistent pattern among family firm types. Consistent with the previous literature, we show that family firms are generally more valuable than their non-family counterparts, and that founder-managed (FM) firms are more valuable than their non-founder-managed (non-FM) counterparts. More important, we provide new evidence that founder-named (FN) family firms have significantly lower … Read more
A corporation’s governance structure does not exist in a vacuum: It can impose externalities on other firms. The existing literature has argued that those externalities can arise because companies interact with each other through various types of relationships. For example, according to Acharya and Volpin (2010), firms compete against each other in the managerial labor market. When a firm’s competitors adopt a low level of governance (e.g., by appointing a weak board of directors) and thus allow their managers to extract large benefits for themselves, the firm’s managers have an incentive to join those competitors, which in turn forces the … Read more
On April 7th, the Department of Labor (“DOL”) published its final rule delaying the applicability dates of its rule changing the definition of the term “fiduciary” (the “Fiduciary Rule”) and related prohibited transactions exemptions (“PTEs”) by 60 days, as proposed. The new timeline for compliance with the Fiduciary Rule is as follows:
- June 9, 2017 – The Fiduciary Rule becomes applicable, and new PTEs as well as amendments to existing PTEs are also applicable.
- June 9, 2017 – Firms relying upon the BIC Exemption or the Principal Transactions Exemption (each discussed below), must comply with Impartial Conduct Standards but
… Read more
Debate about the ideal tenure length for directors has been reignited with the recent international proposals to limit the terms of independent directors. The underlying motivation for such proposals is to ensure that “the purpose behind the independent director rule is not lost.” While some firms already have term limits, such limits tend to be rather long. Because the average length of director tenure has been increasing, practitioners and regulators have begun questioning whether there is such a thing as optimal board tenure. Firms and regulators understand and acknowledge the benefits of long tenure, such as knowledge continuity … Read more