The Unethical Leader: Who Follows?

When high-profile cases of fraud make the news, we often focus our attention on the CEO or other C-suite executives, asking what signs were missed and how we might better anticipate who might commit fraud. Academics have researched the characteristics of those who commit fraud, including such exemplars as Bernie Ebbers.[1] Recent research has focused on narcissism, the trait that includes self-aggrandizement, the need for admiration, dominance over others, and other signs of grandiosity, as a significant indicator of a leader whose personal ethics will allow him or her to pursue personal gain and glory at the expense of … Read more

“No Pay” Bylaws May Threaten Shareholder Lawsuits

After Delaware prohibited fee-shifting provisions in corporate bylaws,[1] scholars considered alternate means by which corporations might use private ordering to limit the ability of stockholder plaintiffs to bring lawsuits challenging corporate actions.  For instance, Professor Sean Griffith suggested that corporations should adopt “no pay” provisions that, unlike fee-shifting provisions, would prohibit a corporation from paying the legal fees of stockholder plaintiffs.[2]  Griffith’s proposal is similar to one put forward by another Delaware practitioner shortly before the fee-shifting ban.[3]  Other commentators have suggested that such “no pay” bylaws may be the wave of the future.[4]

“No pay” … Read more

Gibson Dunn on Justice Holland’s Lasting Imprint on Corporate Law

In early February, Justice Randy Holland, the longest-tenured member of the Delaware Supreme Court, announced his plans to retire at the end of March 2017.  At the time of his appointment in 1986 by Governor Michael N. Castle, Justice Holland was the youngest person ever to serve on the Court.  He became its longest serving member in 2009.

According to our research, during his 33-year tenure, Justice Holland authored over 800 electronically reported decisions and imparted a legacy of addressing several key areas of Delaware corporate law.   In reviewing his most cited decisions, it is clear Justice Holland has left … Read more

Gibson Dunn Discusses Corporate Social Responsibility

Over the past few years, interest in corporate social responsibility (“CSR”)[1] has increased significantly.  The spotlight on CSR has led companies to expand and strengthen their CSR efforts.  Many companies in turn have published sustainability reports, posted materials on their websites and made other statements about their past CSR efforts and future CSR goals.  Certain website CSR disclosures are also required by statutes such as the California Transparency in Supply Chains Act of 2010 and the U.K. Modern Slavery Act 2015.[2]  Some organizations are also encouraging companies to include more CSR statements in their filings with the Securities … Read more

How Board Evaluations Fall Short

The New York Stock Exchange requires that the board of each publicly traded corporation “conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively.” The purpose of this exercise is to ensure that boards are staffed and led appropriately; that board members, individually and collectively, are effective in fulfilling their obligations; and that reliable processes are in place to satisfy basic oversight requirements.

Research evidence suggests that, while many directors are satisfied with the job that they and their fellow board members do, board evaluations and boardroom performance fall short along several important dimensions. … Read more

Unicorns, Guardians, and the Concentration of U.S. Equity Markets

Developments in private and public markets are changing the role equity plays in the United States, i.e., what “stock” means as a matter not only of investment and corporate governance, but also of political economy.  For several generations, a broad middle class invested directly in bureaucratically run corporations, disciplined by securities and other laws.  The governance of firms and therefore much of the economy was answerable to this broad middle class.  Perhaps most important, citizens understood such arrangements as “the free enterprise system” or even “the American way.”  We call this a “republican” imagination of equity markets.

There has recently … Read more

What Matters in Governance?

In the past 20 years, many corporate law scholars have come to the view that governance arrangements protecting incumbents from removal are what really matter for firm value, arguing that such arrangements help entrench managers and harm shareholders. A major factor supporting this view has been the rise of empirical studies using corporate governance indices to measure a firm’s governance quality. Providing seemingly objective evidence that protecting incumbents from removal reduces firm value, these studies have encouraged the idea that good corporate governance is equivalent to stronger shareholder rights.

In our recent article, we challenge this idea, presenting new empirical … Read more

Blue Sky Banter: Lynn LoPucki on Corporate Charter Competition

Professor Lynn LoPucki of UCLA School of Law speaks with Reynolds Holding about the competition among states for corporate  charters. Many people assume that the game is over and Delaware — the corporate home of more than half of U.S. public companies — has won. But as Professor LoPucki explains, Delaware is vulnerable, the competition continues, and as a result the regulation of corporations in America is just about non-existent. Click on “read more” to hear the conversation — on the Blue Sky Banter podcast… Read more

How Impact Investing Threatens Corporate Governance

There is a certain immediate attractiveness associated with the idea of impact investing. The objectives of many impact investors are in some ways similar to those of many critics of capitalist societies: both groups want to contribute to the achievement of various socially worthy objectives that the market does not seem to satisfy by itself, at least not to a sufficient extent. But unlike anti-capitalist political activism, which is based on the beliefs that markets are inherently flawed, impact investing looks like a classic affirmation of the market: by putting his money where his mouth is, an impact investor may … Read more

Corporate Charter Competition

In an article to be published in the Minnesota Law Review, I use systems-strategic analysis to explore the role of charter competition in corporate law. A systems-strategic analysis begins by identifying a law-related system for study, then describes how the system functions, and finally infers from that function what goals the system is pursuing. The system analyzed in this article is the system by which American corporate law is produced, adopted, and enforced—the corporate charter competition. Although charter competition extends to private corporations and other types of entities, I limited my analysis to the public company context because the competition … Read more

Cleary Gottlieb Offers Advice on Responding to a Social Media Attack

President Trump has repeatedly used his Twitter account to single out companies for criticism of their business practices, raising the question for a broad range of public companies of how to prepare for and potentially respond to such criticism.  Of course, rhetorical attempts by politicians to influence the conduct of private enterprise – commonly referred to as “jawboning” – are an old political tactic.[1]  The nature and frequency of jawboning in the current environment makes this a serious issue for boards and management at a wide variety of public companies, in a way that it has not been in … Read more

Center-Left Politics and Corporate Governance

Although U.S. corporate law has traditionally been left to the states, it is widely understood that a host of federal actors can and do affect the broader rules of corporate governance in fundamental ways.  How might the corporate governance landscape change, then, in response to the tectonic shifts recently experienced in American politics – forces reflected most dramatically in the November 2016 election?  Discerning how such dynamics might affect corporate governance moving forward naturally requires a thorough reckoning of how state and federal political forces have affected the field’s development to date.  In a recent paper, I provide such … Read more

Detecting Managed Earnings With CEO Profiles

Earnings management is the use of managerial discretion to apply accounting standards or construct business transactions in a way that alters reports on the financial health of an organisation [1]. Earnings management can include both legitimate and illegitimate methods “to smooth earnings over accounting periods or to achieve a forecasted result.” [2] For example, in periods of good financial performance, managers may increase provisions for bad debts or for obsolete inventory to create reserves for future use. Alternatively, in periods of poor financial performance, managers may reduce or reverse those provisions to inflate reported earnings. Similarly, managers might also construct … Read more

Hedge Fund Activism as a Conflict of Entrepreneurship

Hedge funds have boosted shareholder activism worldwide. In my recent article, I discuss the policy response to hedge fund activism. I argue that the short-termism debate cannot shed light on the desirability of such activism. Rather, hedge fund activism should be regarded as a conflict of entrepreneurship, namely a conflict about the most efficient horizon to maximize profit. The choice of this horizon, which is uncertain, belongs to the entrepreneur. An engagement by hedge funds reveals that their views about this particular point differ from that of the incumbent management. Because the efficient horizon to maximize profit varies with the … Read more

Tax Gross-Ups May Gross Out Investors

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

Skadden Discusses Trump’s Potential Impact on Executive Compensation

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

Gibson Dunn Reviews U.S. Cybersecurity and Data Privacy

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

Board Forecast: Continuing Gatekeeper Anxiety

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

Business Courts May Improve Firm Performance

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

Wachtell Lipton Shines a Spotlight on Boards for 2017

This past year witnessed a number of new corporate governance initiatives. Among the most significant:

Read more