CEO outside directorships and their value to companies have been a topic of debate among a wide range of stakeholders, particularly investors, boards, and policy makers. Some argue that CEO outside directorships benefit a CEO’s own firm by opening valuable resources in other boardrooms and the corporate elite and by allowing first-hand insights into successful firm strategies. Others, particularly proxy advisers and some journalists, call connected directors “overboarded,” suggesting that outside directorships consume too much of a CEO’s time while remitting little or no value to the CEO’s own firm. Reflecting that criticism, S&P 500 CEO outside board assignments haves … Read more
Shareholder lawsuits have long prompted intense debate. Despite increased corporate democracy and shareholder rights, some commentators argue that shareholder litigation is still a shareholder’s best option to bring about changes. Shareholder litigation can impose personal liability on corporate managers and directors for breach of the duties of care (negligence) and loyalty (conflict of interest). However, there is a collective action problem associated with shareholder lawsuits, and some argue that the principal beneficiaries of shareholder lawsuits are attorneys.
In a recent study, we move the debate on shareholder lawsuits forward by studying the impact of shareholder litigation threats on CEOs’ employment. … Read more
In late 2019, somewhat surprisingly, the Business Roundtable issued a brief statement advocating “a fundamental commitment to all of our stakeholders,” thus ending its decades long singular commitment to shareholder value.
The statement triggered an intense global debate about the purpose of the modern corporation. In academia and in policy circles, new attention is now being paid to whether or not pursuit of profit is the sole obligation of the corporation. Legislation that would mandate a more significant role in corporate governance for stakeholders was introduced by Sen. Elizabeth Warren and may, in light of the commitment of the Biden … Read more
Late in the afternoon of the Friday before Election Day, the Department of Labor finalized a rule that requires pension and retirement plan fiduciaries to consider only financial interests when investing plan funds. On its face, the rule seems anodyne. Yet it has provoked a strong negative reaction from fund managers and others who advocate for use of Environmental, Social, and Governance (“ESG”) factors in investing.
This negative reaction is puzzling. Advocates for ESG investing, such as the United Nations and BlackRock’s Larry Fink, argue vociferously that ESG investing makes money while also doing good. The rule requires pension … Read more
In the United States this past year, growing movements for social, racial and environmental justice, and the impact of an unprecedented health crisis, have coincided with a range of institutions increasing their focus on promoting environmental, social and governance (“ESG”) initiatives as part of their businesses. Banks and other financial institutions are among those undertaking efforts to expand their ESG activities. Notably, some banks are taking these actions despite that, under the law today, they are subject to few if any regulations that promote ESG initiatives. None of the U.S. federal bank regulators, for instance, mandate expansion of ESG-related activities … Read more
Economist Albert O. Hirschman (1970) classically set out the two alternatives facing dissatisfied members of an organization: They can voice displeasure or exit for greener pastures. Hirschman’s model has long explained the tradeoff facing shareholders of a poorly governed firm: Agitate for change or take the “Wall Street Walk” by selling shares. Professor John C. Coffee (1991) showed that large institutional investors have little incentive to voice their concerns to monitor portfolio firms, a trend exacerbated by low-fee “passive” portfolio management (Bebchuk et al., 2017).
While voice is often too costly for passive investors, exit is … Read more
In a new paper, I document a recent and strong standardization in the structure of executive compensation. This standardization is unexpected since, in principle, the optimal incentive contract is a function of many factors that vary among firms. Executives receive compensation in many different forms, including salaries, bonuses, long-term incentives, stock, stock options, retirement benefits, and various types of perquisites. Based on contract theory, we expect that each company designs its compensation plans using these elements in different proportions. However, even though we observe much heterogeneity in the design of compensation plans, more than 25 percent of the variation across … Read more
Corporate purpose is having a moment, as it seems to do each generation or so. The Business Roundtable made waves last year by pivoting away from shareholder centrism in its “redefinition” of corporate purpose. Directors, officers, institutional investors, and others have been buffeted by a new enthusiasm for SRI, Social Impact, and ESG investing. B Lab and a growing cadre of academics, public intellectuals, and legislators have generated interest in bespoke organizations capable of fostering social enterprise. Taken in whole, these developments have fed bold predictions of a generational shift toward prosocial preferences amongst investors and entrepreneurs.
At the center … Read more
My article, Corporate Family Matters, proposes a definition of and governance regime for a particular type of corporate group – the family. I define the family as an enterprise formed by weaving corporations, partnerships, and LLCs together into a mix of public and private entities acting for the benefit of a parent corporation or for the personal gain of one or more leaders of the enterprise. A corporation should be treated like a family when: (1) there is more than one entity with shared ownership or management or when an entity is wholly-owned by another entity and (2) that … Read more
Institutional investors are increasingly playing a major role in the shift toward stakeholder capitalism. They are also facing pressure from their clients and others to focus more on ensuring that their investments promote corporate sustainability. Such expectations are reinforced by leading institutional investors’ commitments – such as those included in BlackRock CEO Larry Fink’s 2020 annual letter – to do well by doing good.
In a recent article, I shed fresh light on the role of leading institutional investors in the transition toward stakeholder capitalism. I show that, while institutional investors may encourage the adoption of sustainability-oriented policies by corporations, … Read more
On December 1, the Nasdaq Stock Market asked the Securities and Exchange Commission (SEC) for authority to adopt new listing rules aimed at increasing board gender and racial diversity. If approved, Nasdaq-listed companies will be required to disclose their board diversity data and have, or explain why they don’t have, one female and one underrepresented minority board member. Nasdaq’s The request is the latest milestone on the business and investment community’s journey to transforming corporate culture by uprooting long-established power imbalances.
As I map out in my recent article, “Sex, Power, and Corporate Governance,” the #MeToo movement first prompted key … Read more
Two recent decisions of the Delaware courts confirm that Section 220 of the Delaware General Corporation Law will be consistently interpreted to grant pre-complaint discovery to stockholders seeking to prepare fiduciary-breach litigation.
In Pettry v. Gilead Sciences, Inc., a group of Gilead stockholders sought to inspect corporate documents for the purpose of investigating wrongdoing in the development and marketing of HIV drugs. C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020). Gilead opposed the demand, principally on the ground that the stockholders’ basis to suspect such wrongdoing—unproven allegations in other lawsuits—was inadequate to justify inspection. The court disagreed, finding … Read more
Sustainability in business and environmental, social, or governance (ESG) factors in finance have entered the mainstream. In 2020, the CEO of Blackrock wrote: “Our investment conviction is that sustainability and climate integrated portfolios can provide better risk-adjusted returns to investors.”
At NYU Stern’s Center for Sustainable Business, we set out to study the state of the research on the topic and surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ~1,400 underlying studies) published between 2015 and 2020. Recent interest is enormous: The research output over the last five years matches the number of articles published prior to 2015.… Read more
What do the emergence of independent directors in South Korea, the legal reforms on related-party transactions in India, the continued rise of environmental, social, and governance (ESG) factors in the United States, and the global spread of corporate governance codes have in common? They all trace back to efforts by international organizations – the International Monetary Fund (IMF), the World Bank, the United Nations, and the Organisation for Economic Cooperation and Development (OECD), respectively – to shape corporate governance around the world. The different corporate guidelines and norms produced by international organizations have had a noticeable impact on legal changes … Read more
In a 1987 paper, available here, we argued that non-investor stakeholders play an important role in influencing financial policy and corporate valuation. We also distinguished explicit claims between a company and its counterparties from what we called implicit claims. In more recent years, there has been a growing focus on non-investor stakeholders and environmental, social, and governance (ESG) and, in particular, their role in creating corporate value. Left largely unexplained, though, is how this occurs. Here we argue that one of the keys is the distinction between explicit and implicit claims.
Explicit claims are familiar contracts. These include employment … Read more
On October 29, 2020, The New York State Department of Financial Services (“DFS”) published an industry letter (the “Industry Letter”) for banks and other financial institutions that it regulates that details the range of climate change risks that could soon impact these institutions. The letter is addressed to both DFS-regulated banking institutions and non-bank institutions, such as money transmitters and virtual currency companies. The letter sets forth DFS’s expectations that banking institutions begin to address the financial risks from climate change in their risk management processes, governance frameworks and business strategies, including by designating a board member or committee … Read more
In our recent paper, Can Governance Help in Making an IPO “Successful”? New Evidence from Europe, we find that corporate governance affects company performance after an IPO in different ways. We consider an IPO to be successful if it combines positive performance in the short-term, with a value creation effect, and also in the medium-long-term, with a value protection effect (Bertoni et al., 2014).
As to the short-term, we consider the performance of a company at the date of the IPO, as measured by Q-Tobin, which is calculated as the ratio of the market capitalization of the firm … Read more
Historically, how a corporation invests and pursues its goals has been recognized as within the discretion of the board of directors. The business judgment rule insulates directors from liability for exercising that discretion by restricting second-guessing from shareholders absent a showing of fraud, illegality, or self-dealing. In other words, a business decision that doesn’t turn out well shouldn’t be questioned as long as the directors acted in good faith.
In recent years, though, the business judgment rule seems to have been eroded by forces from both the political right and the political left. Those leaning right assert that the obligation … Read more
With the prospect of global vaccines on the horizon, companies worldwide continue to address the challenges of pandemic management and recovery on their businesses, the communities and constituencies they serve and especially on their employees. As companies seek to prioritize workplace and customer health and safety alongside productivity and the achievement of strategic plans, the psychological, as well as physical, well-being of employees has been brought into sharper focus this year. The urgent need to address issues of diversity, inclusion, racism and racial injustice, gender equality, and attendant financial and socioeconomic inequities has heightened attention to workplace wellness, as have … Read more
In August 2019, the Business Roundtable released a statement redefining the purpose of a corporation to maximize value “for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders.” The statement was signed by 181 CEOs, including Jamie Dimon, chairman and CEO of JPMorgan Chase and chairman of the Business Roundtable, and came after several years of political pressure on behalf of stakeholder objectives, including by U.S. Senator Elizabeth Warren. In 2018, Warren introduced the Accountable Capitalism Act, which would require that directors of large corporations consider the interests of all stakeholders and that at least 40 percent … Read more