John Coffee Headshot

Trumping the Constitution

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.”[1]

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

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Companies Face Risk and Opportunity with Distributed Governance Structures

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

Cleary Gottlieb Explores What’s Next in UK Corporate Governance Reform

On November 29, 2016, Prime Minister Theresa May’s government issued a green paper[1] (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

Debevoise Analyzes Revised New York Cybersecurity Regulation for the Financial Sector

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)[1] 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

Roy Shapira

Reputation Through Litigation

“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

Sullivan & Cromwell Discusses Bank Liquidity Requirements

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

Read more

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How Institutional Investor Objectives Affect Firm Valuation and Governance

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

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Making Sense of Corporate Governance in U.S. Firms

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

Sullivan & Cromwell Reviews and Analyzes 2016 U.S. Shareholder Activism

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

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Corporate Culture: Evidence from the Field

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

Abraham Cable

Fool’s Gold? Equity Compensation and the Mature Startup

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

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Does CEO Succession Planning Matter?

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

Gibson Dunn Discusses Proxy Advisers’ 2017 Voting Guidelines

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

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Staggered Boards and Long-Term Firm Value, Revisited

For a long time, the academic literature has largely supported the view that staggered boards — which require challengers to win at least two election cycles to gain a board majority — entrench directors and managers to the detriment of shareholders.[1] Empirically, this view was based on the finding of a negative association between having a staggered board and firm value. In our new article, “Staggered Boards and Long-Term Firm Value, Revisited,” forthcoming in the Journal of Financial Economics, we reconsider the staggered board debate using a comprehensive sample period (1978–2015) and document evidence that suggests the … Read more

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An Efficient Investment-Risk Model of Compliance

Corporate compliance — the internal processes that firms use to ensure that their employees do not violate applicable laws and regulations — has become big business. Regulation of business continues to grow, punctuated by landmark laws that have re-shaped the financial services (the Dodd-Frank Act) and health care (the Affordable Care Act) industries in the United States. Further, federal regulators have substantially ramped up their enforcement of numerous existing laws such as the Foreign Corrupt Practices Act and those governing insider trading. Corporations are dedicating greater resources towards internal compliance, both within legal departments and increasingly in separate and independent … Read more

Sullivan & Cromwell Discusses Hacking and Cyber Threats to Director Communications

The growth in cybersecurity threats combined with the increasing demands placed on outside directors create challenges that often go beyond the risks that public companies face from employee and client communications.  If public companies cannot communicate quickly with directors or directors cannot easily share information and discuss options, corporate governance will suffer.  On the other hand, outside directors often have professional responsibilities to multiple organizations and, accordingly, are more likely to rely on electronic communications that are outside of any particular company’s technology resources.

Recent hacking incidents highlight the need for public companies to review their director communication practices to … Read more

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Why Public Benefit Corporations?

Of all the social and economic challenges to the current state of Delaware corporate law, perhaps the most potentially revolutionary is the shift in attitudes about the very purpose of corporations.  Delaware corporate law holds as a core precept that the corporation’s goal is to maximize shareholder value.  Corporations’ freedom to serve the goals of other corporate constituencies (such as employees, customers, or the communities in which the companies operate) or to serve broader goals such as protecting the environment or aiding the poor is constrained by the requirement that any such efforts be primarily aimed at improving the bottom … Read more

Weil, Gotshal Discusses Universal Proxy Cards in a Trump Administration

On October 26, 2016 the U.S. Securities and Exchange Commission proposed proxy rule amendments that would require, in a contested election of directors, the public company and the shareholder activist to each use a “universal” proxy card – i.e., a card that includes the names of both parties’ nominees.  Under the proposal, shareholders would be able to vote by proxy for a mix of company and dissident nominees of their choosing (i.e., “splitting the vote”).  Currently, split-ticket voting can be accomplished only by attending the shareholder meeting and voting by ballot.  The proposed changes are an attempt by the SEC … Read more

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What Corporate Law’s Emphasis on the Long Term Might Mean

To read influential corporate lawyers, legal academics, and jurists, shareholders are an alarmingly myopic bunch who demand that corporate directors and managers make short-term decisions that sacrifice long-term value. The group receiving the most scolding of late is hedge fund activists. Leo E. Strine, Jr. the chief justice of the Delaware Supreme Court and a commentator on corporate law, says we “must recognize that directors are increasingly vulnerable to pressure from activist investors and shareholder groups with short-term objectives, and that this pressure may logically lead to strategies that sacrifice long-term performance for short-term shareholder wealth.” Delaware corporate law enshrines … Read more

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Shareholder Activism in the Era of Trump: What Strategy Works?

In the approaching Era of Trump, we are likely to see much deregulation, reduced public enforcement, and possibly some curbs on private enforcement.  Corporate compliance efforts may also be downsized, and compliance officials may learn again to defer to the judgment of the entrepreneurs in the corporation’s profit centers.  If a bubble develops in financial stocks (as seems more than possible), some corporate debacles and scandals become predictable.  What defenses do shareholders have in this brave new world?

Here, Wells Fargo & Co’s decision to claw back a record $60 million from two senior executives ($41 million from CEO John … Read more