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VUCA and the Management of Legal Risk

VUCA is an acronym for volatility, uncertainty, complexity, and ambiguity – four dimensions of risk – and a tool that can used to better manage legal risk. Designed by the U.S. military and reinforced by business,[1] it describes an environment that is so continuously buffeted by legal, social, and economic risks that it’s persistently at the edge of chaos. Threats are uncertain and diffuse and conflict is inherent and unpredictable.

In a new paper, available here, I show how firms can respond to legal VUCA in order to capture value and manage risk. In this post, I first … Read more

A Rule-Based Method for Comparing Corporate Laws

Scholars, lawyers, judges, and policymakers frequently need to compare corporate laws, both internationally and domestically.  In part, this need results from the internal affairs doctrine, a conflict-of-laws rule that is unique to corporate law.  The doctrine requires that courts apply the corporate law of the state or country of incorporation to the corporation’s internal affairs.  Because corporations can easily and inexpensively incorporate anywhere—regardless of the locations of their headquarters or operations—the internal affairs doctrine enables them to pick their governing laws from an almost worldwide menu. The result is that even many corporations operating solely in the United States are … Read more

Enhancing Governance in Dual-Class Share Firms

In a typical public company, shareholders can elect the board, appoint the auditors, and approve fundamental changes.  In other words, they can participate in the governance of the firm. Firms with dual class shares (DCS) alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the firm without providing them with the corresponding power to elect the board and exercise other voting rights. I argue that this misalignment of rights and risks should be subject to three modest reforms in order to enhance governance in DCS firms.

The rationale underlying DCS is that they … Read more

Protecting LLC Owners While Preserving LLC Flexibility

Limited liability companies, or LLCs, have emerged as the entity of choice for new businesses.  The form attracts many everyday owners and entrepreneurs as an easy way to combine corporation-style limited liability protection with partnership-style tax treatment. LLCs also offer an appealing means for sophisticated players to craft more flexible internal governance arrangements without fiduciary duties and other governance terms required of other organizational forms.  LLCs thus cater to two very different groups: average investors, and very sophisticated parties.  Unfortunately, as LLCs have grown in popularity, so too have the stress fractures that result from satisfying these two divergent groups.  … Read more

Fried Frank Discusses Delaware Decision Absolving LCC Board of Duty to Maximize Price

In Miller v. HCP (Feb. 1, 2018), the Court of Chancery dismissed claims made against the members of a limited liability company board, a majority of whom had been appointed by the private equity firm that was the company’s controlling stockholder, for approving a sale of the company to an unaffiliated third party that was championed by the controller—without attempting to maximize the price.

Under the LLC operating agreement’s “waterfall” provisions governing the allocation of proceeds on a sale of the company, the controller was entitled to receive almost all of the proceeds of any sale up to $30 million … Read more

Changes in Corporate Governance: Externally Dictated vs. Organically Determined

Several major corporate scandals in the United States during the early 2000s brought attention to corporate governance of large U.S. companies. As a result, Congress passed the Sarbanes-Oxley Act (SOX), and the Securities and Exchange Commission (SEC) announced several regulations aimed at restoring public confidence in the governance of public corporations. While significant research has been conducted on the relation between corporate governance and firm performance, there is no agreement yet on whether changes in governance structure are beneficial for companies and improve firm performance, especially when the changes are dictated by regulation.

The main question is whether mandatory rather … Read more

Following the Corporate Governance Canon Pays Off for Chinese Companies

Over the years, a consensus on the best corporate governance practices has emerged. The OECD Guidelines of Corporate Governance epitomize a canon of such practices, including things like having non-executive shareholders on boards, having an audit committee, and following special rules when trading with other companies owned by your company’s bosses. Yet, every canon brings about its own counter-reformation. Over the years, there have been calls to treat emerging markets like Russia and China as special cases. State-owned capital, combined with Asian values, has obviously paid off – as evinced by China’s more than 5 percent growth. Is it true, … Read more

Perpetual Dual-Class Stock: The Case Against Corporate Royalty

My first few weeks at the Securities and Exchange Commission have been a whirlwind—and just to be clear, I am not talking about the markets.[1] In a few short weeks, I have gotten a crash course on SEC policymaking—and enough reading to empathize with my former law students, who used to tell me, to my puzzlement, that my Corporate Law syllabus was not exactly beach material.

But in between the policy memos that come across my desk, I’ve also had the pleasure of working with my new colleagues on the SEC’s Staff. They’ve taught me a lot in a

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Corporate Governance that Works for Everyone

Corporate governance has traditionally been viewed as a way to reduce agency costs between shareholders and managers in the context of private ordering.  Laws and regulations pertaining to corporate governance have, therefore, typically aimed to enhance long-term wealth for shareholders.

Governments have in recent years, however, discovered a new use for corporate governance: advancing the public interest. This has been done by promoting everything from environmental causes to gender diversity to humanitarian aid. In the United Kingdom, the government has been explicit in advocating this view of corporate governance.  Prime Minister Theresa May has expressly noted that corporate governance should … Read more

Wachtell Lipton Discusses Investor Engagement in the New Paradigm for Corporate Governance

The accelerated interest in sustainability, ESG, corporate social responsibility and investment for long-term growth and value creation (the new paradigm) as most cogently exemplified by Value Act’s newly formed Spring Fund focusing on promoting environmental and social goals of the companies in which it invests; by the promotion by the World Economic Forum of “The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth;” by the creation of the Investors’ Stewardship Group and its issuance of its principles for stewardship which embrace ESG and long-term investment; and, finally,

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Europe Faces Problem of Strong Shareholders and Weak Outside Investors

Corporate governance literature has largely focused on listed firms with dispersed ownership, but those with controlling stockholders are increasingly important in the United States and Europe. In the U.S., the likes of Google, Facebook, and other technology firms have gone public with their founders retaining a controlling stake. This has prompted interest in understanding the impact that controlling shareholders have on firm value and the problems they pose for outside investors. Moreover, in Europe, where most listed firms have controlling shareholders, the control exercised by those shareholders has been blamed for the gap in stock market development relative to the … Read more

New Year’s Resolutions for Director Compensation from Investors Bancorp

In recent years, shareholder plaintiffs have brought a series of claims before the Delaware Court of Chancery alleging that directors of Delaware companies have abused their discretion in granting themselves excessive equity compensation for their board service.  These cases raised the threshold question of whether the plaintiffs’ challenges should be reviewed under the “entire fairness” standard, which requires the company to bear the burden of proving that the director awards were fair, or the more deferential “business judgment” standard, which grants considerable discretion to directors’ decisions, often resulting in dismissal of claims that fail to plead particularized facts indicating fiduciary … Read more

Has Their Time Come? A Tale of Two Corporate Responsibility Movements

Amid the many calls for corporations to be socially responsible, two movements that have emerged since the turn of the 21st century stand out as being particularly serious about defining and holding corporations accountable to higher standards. One is the business and human rights (BHR) movement, which includes human rights advocates, socially responsible investors, businesses, government and UN officials, and academics and seeks to hold businesses accountable for harming human rights and to promote corporate respect for human rights. The other is the B Corp movement, comprised of two types of entities: benefit corporations, whose charters require them to have … Read more

Proxy Access and Optimal Standardization in Corporate Governance

According to conventional wisdom, “one size does not fit all” in corporate governance. Firms’ governance needs vary, implying that the optimal corporate governance structure for one company may not work for another. This one-size-does-not-fit-all axiom has featured prominently in arguments against numerous corporate law regulatory initiatives, including the SEC’s failed Rule 14a-11—an attempt to impose mandatory, uniform “proxy access” on all public companies—which the D.C. Circuit struck down for inadequate cost–benefit analysis.

In a recent paper, I present an alternative theory on the role of standardization in corporate governance—in which investors prefer standardized terms—and empirical evidence that is consistent with … Read more

What Happens When an Activist Goes on the Board?

After over a year of work, which included the review of some 635,450 Form 8-Ks filed by 7,799 public companies from January 1, 2000, to September 30, 2016, we think we know at least one answer to the question in the above title: Informed trading soars! We have just posted our research, which we co-authored with former Columbia Law Professor and now SEC Commissioner Robert Jackson and Robert Bishop, a recent Columbia Law graduate, on SSRN,[1] available here. Above all, it shows that following the appointment of a hedge fund-nominated director to the board, the target firm experiences … Read more

Weil Discusses 2018 10-K and Proxy Season: Spotlight on Corporate Sustainability

Institutional investor calls for enhanced transparency regarding portfolio companies’ identification and management of evolving sustainability risks gained considerable momentum over the past year, as reflected in shareholder voting patterns during the 2017 proxy season, developments in investor “stewardship” codes and a pronounced increase in “voluntary” corporate sustainability reporting. We expect this trend to continue, or even accelerate, during the 2018 season.

What is Sustainability and How Much Does it Matter to Investors?

The term “sustainability” is generally understood to mean environmental, social and governance (ESG) issues that can affect investment and/or proxy voting decisions associated with corporate stock ownership. It … Read more

Deadlock on the Board

The board of directors is the highest decision-making authority in a corporation. But sometimes boards struggle to make decisions. In surveys, 67 percent of directors report the inability to decide about some issues in the boardroom. Moreover, 37 percent say they have encountered a boardroom dispute threatening the very survival of the corporation. [1] Such a “division among the directors”—such deadlock on the board—“may render the board unable to take effective management action” and can even lead directors to “vote wholly in disregard of the interests of the corporation.” [2]

Last summer, deadlock on the board made it hard for … Read more

Excluding Shareholder Proposals: When Ratification Creates a Direct Conflict

The annual scrum between companies and shareholders seeking to have their proposals included in the company’s annual proxy statement is well underway.  One of the bases upon which a company may exclude a shareholder proposal from its proxy statement is if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”  After some controversy in 2015 over the scope of what it means to “directly conflict,” the SEC staff issued Staff Legal Bulletin (SLB) 14H, which said that proposals conflict only “if a reasonable shareholder could not logically vote in favor … Read more

The Governance Implications of Business Disruption

In 2018, corporate boards will increasingly be called upon to respond to how innovative competitors disrupt their companies’ business models.  These competitors use technology, scale, and sharp insights into consumers to lower prices, improve products and services, and draw customers away from traditional companies, forcing those companies to cut costs and lose relevance.[1] Blockbuster, Borders, and ESPN are prime examples of victims of nimble disruptors.

Victims typically overlook the trajectory of disruptors, which focus initially on perfecting their business models rather than their products or services.[2]  Flawed governance can lead to such oversight by making it hard for … Read more

Corporate Governance, Tax Avoidance, and Finance Constraints

In response to greater financial constraints and more costly external financing, firms may avoid corporate taxes to generate funds for investment. In that sense, outside investors may recognize tax management as a value-increasing activity, especially for a financially constrained firm. However, more aggressive tax avoidance may also be associated with increased opportunities for rent diversion by firm managers. Therefore, the impact of corporate tax avoidance on financial constraints is likely to depend on the strength of a firm’s corporate governance. In an article forthcoming in Financial Management [1],  we examine how corporate governance affects the relationship between a firm’s tax … Read more