Corporate Governance

Skadden Discusses Government Expectations for Companies’ Data-Driven Compliance Programs

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As artificial intelligence and other data tools have proliferated, regulators and prosecutors expect companies to utilize sophisticated data analytics as part of their compliance programs. They also expect directors to take an active role, understanding and overseeing these data-driven compliance programs.

Recent lawsuits, enforcement actions and surveys suggest, however, that many companies have not kept up with the rising expectations and may not be utilizing available data to flag potential compliance problems as well as they could – perhaps not even as well as the government is already doing.

A careful reading of enforcement cases, policies and public statements shows … Read more

Capitalism, Heal Thyself

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A paradigm shift is underway: The corporation – much reviled as a cost-externalizing, short-termist, inward-focused, politically manipulative machine – is undergoing a fundamental change. This is good news. Corporations are beginning to confront the harm they created, allowing capitalism to start healing itself.

The Rise of ESG Investing

There are three powerful factors at work. First, most large investment funds are either incorporating ESG into their investment decisions or tracking stock market indices.  Either way, there is the growing realization that bad companies or bad investments can hurt the entire portfolio. Big investors are realizing that everything is connected, and … Read more

Wachtell Lipton on Dealing with Activist Hedge Funds and Other Activist Investors

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Despite a short dip at the outset of the pandemic, activism has rebounded and now continues at an ever-growing intensity.  As we have previously noted, regardless of industry, size or performance, no company should consider itself immune from activism.  No company is too large, too popular, too new or too successful.  Even companies that are respected industry leaders and have outperformed the market and their peers have been and are being attacked.  And companies that have faced one activist may be approached, in the same year or in successive years, by other activists or re-visited by the prior activist.

Although … Read more

Do Investors Pay Less Attention to Women Fund Managers?

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It is well-documented that relatively few women manage investment funds. In 2019, for example, women accounted for 37.5 percent of all lawyers, 49 percent of judges, 34.5 percent of economists, 19 percent of surgeons, and 26 percent of chief executives, according to the U.S. Census Bureau. In contrast, the percentage of funds managed by women is not only low, it has barely changed: It was 10.3 percent in 2016 and 11 percent in 2020.

While there are several explanations for the employment gap between men and women in various industries, financial economists have argued that investors in mutual funds discriminate … Read more

The Price of Your Vote: Proxy Choice and Securities Lending

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On October 7, 2021, BlackRock announced that, beginning in 2022, institutional clients would have the opportunity to direct the voting of shares held by index funds.  Some commentators heralded this change as “a catalyst for others in [the investment management] industry” and a move that would “expand the voting choice options for investors,”[1] though others were noncommittal or downright skeptical.[2]

Did BlackRock bury the lede?  Consider the following fine print: “BlackRock will determine eligibility criteria under this program based upon . . . financial considerations, including the decision to lend securities.”[3]  In an era of rock-bottom … Read more

The Lowdown on Related Party Transactions by Directors or Managers in Public Companies

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Though no longer surprising, corporate scandals can still involve the unexpected. Take the recent Carlos Ghosn and Nissan saga, for example. Aside from its sensational aspects, what is striking about the scandal was Ghosn’s alleged value-diverting related party transactions (“RPTs”) (see here and here). Though not unusual on their own, RPTs can be noteworthy when they occur between a director or manager (who is not a significant or controlling shareholder) and a company with a controlling shareholder. Ghosn was the chairperson of the board of directors of Nissan, which was controlled by another automobile company, Renault SA, (see here… Read more

The Cost (and Unbenefit) of Conscious Capitalism

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We examine how shareholders and other stakeholders were affected by a quasi-exogenous shock to corporate governance that began to emerge state-by-state across the United States in the 1980s. The shock came from so-called “constituency statutes,” which allow, but do not require, directors to take into consideration stakeholders rather than just shareholders when making decisions (Orts 1992-1993). These statutes prompted an important shift in governance. Under the shareholder primacy principle, directors and managers had a fiduciary duty to make the interests of just one type of stakeholder – shareholders – a priority. Under constituency statutes, they now held the “right” to … Read more

CSR and Firm Survival: Evidence from the Pandemic and the Climate Crisis

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The global challenges of climate change and COVID-19 have created a grim economic outlook, with companies fighting for their very survival. As a result, companies are boosting their brands, and ability to compete, with Corporate Social Responsibility (CSR) programs. The airline industry, for example, responded to the pandemic and pressure to reduce CO2 emissions by playing a crucial role in transporting medical equipment necessary to tackle Covid-19. This step not only contributed to the well-being of society, but also improved the industry’s image and the ability of airlines to survive.

In a new paper titled “CSR and Firm Survival: … Read more

Wachtell Lipton Discusses Delaware Supreme Court’s New Demand Futility Test

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In what promises to be a landmark decision, the Delaware Supreme Court last week reframed the rules governing derivative litigation.  United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021).

A Facebook stockholder sued current and former directors to recover costs the company had incurred in connection with a proposed stock reclassification.  The Court of Chancery dismissed the suit, finding that the plaintiff had failed to establish that at least half of the current directors were incapable of independently evaluating whether to pursue the suit.

The Delaware Supreme Court affirmed.  Writing for the … Read more

Kleptocracy Through Weak Governance at State-Owned Corporations

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1Malaysia Development Berhad (1MDB), a state-owned company purportedly established for the benefit of the Malaysian people, was a vehicle for former Prime Minister Najib Razak to steal billions of dollars over close to nine years.  Called “kleptocracy at its worst” by then-U.S. Attorney General Jeff Sessions, the scandal raised the question of why Malaysian corporate law, modeled on international standards, failed to safeguard against expropriation of such magnitude.  In my new article, I explore this question, highlighting how corporate governance frameworks can be strengthened to guard against similar debacles.

The Doing Business 2020 index ranks Malaysia as second highest … Read more

Weil Gotshal Discusses Boeing Decision and Board Oversight of Product Safety Risks

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The Delaware Court of Chancery’s recent decision denying a motion to dismiss in In re The Boeing Company Derivative Litigation, 2021 WL 4059934 (Del. Ch. Sept. 7, 2021), reminds directors and their counsellors of the importance of board and board committee level oversight and monitoring of “mission critical” product safety risks – in this case airplane safety. Perhaps even more important for litigation purposes, the Boeing decision also reminds directors and their counsellors of the importance of documenting these efforts in a manner that can be produced to stockholders making demands for books and records under Section 220 of … Read more

Uninformative Performance Signals and Forced CEO Turnover

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Evaluating the performance of CEOs is one of the most important tasks of corporate boards of directors. When deciding whether to retain or dismiss CEOs, boards should follow the informativeness principle developed by Holmström (1979) and include all valuable performance signals regarding the quality of the CEOs. Of course, boards should also ignore all uninformative performance signals. For example, CEOs should not be rewarded or punished for, in effect, getting lucky or unlucky.

In a recent working paper, I investigate whether boards violate the informativeness principle in firing CEOs by failing to ignore outcomes that are conditionally uninformative. If … Read more

Wachtell Lipton Discusses Boeing’s MAX Woes in the Boardroom

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In an important decision this week, the Delaware Court of Chancery permitted a Caremark duty-of-oversight claim to proceed against the directors of the Boeing Company.  Stockholder plaintiffs sued Boeing’s board, seeking to recover costs and economic losses associated with the crash of two 737 MAX jetliners.  The plaintiffs’ complaint alleged that the directors failed to monitor aircraft safety before the crashes and then failed to respond to known safety risks after the first crash.  The lawsuit seeks to hold the directors liable for the resulting loss of “billions of dollars in value.”

The court denied the directors’ motion to dismiss.  … Read more

Wachtell Lipton Puts a Spotlight on Boards

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The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  The ongoing coronavirus pandemic and resulting economic and social turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, are propelling a decisive inflection point in the responsibilities of boards of directors.  The 2016 and … Read more

The Corporate Contract and the Internal Affairs Doctrine

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No rule of corporate law may be more foundational than the internal affairs doctrine. The doctrine provides that the internal affairs of a corporation – the “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders”[1] – are governed by the laws of the state in which the corporation is chartered.

Lurking within this widely accepted principle, however, is an even more foundational question: Is the internal affairs doctrine simply a choice of law rule enabling a corporation and its shareholders to choose which state’s law will govern their private business arrangement? … Read more

Arnold & Porter Discusses NY Financial Regulator’s Collection of Diversity, Equity, and Inclusion Data

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On July 29, 2021, the Superintendent of the New York State Department of Financial Services (DFS) issued an Industry Letter (Industry Letter) announcing its new initiative to support diversity, equity and inclusion (DEI) efforts by collecting and publishing data on the diversity of corporate boards and management of its Regulated Banking Institutions and Regulated Non-Depository Financial Institutions (collectively, Regulated Institutions). The announcement of this initiative follows the establishment of a new Statewide Office of Financial Inclusion and Empowerment led by Tremaine Wright, and the initiative is similar to others that have been undertaken by federal and European bank regulators. While … Read more

How Can We Tell Whether Compliance Programs Work?

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In the United States, major financial scandals in the 1970s, 1980s, and 1990s resulted in federal pressure on corporations to inculcate ethical behavior in their employees. The Foreign Corrupt Practices Act, Federal Sentencing Guidelines, Sarbanes-Oxley Act, the U.S. Organization Sentencing Guidelines, and similar laws either mandated or encouraged the expansion of corporate compliance programs[1] and, ultimately, led to creation of a “compliance industry.” In this new industry – just as in any emerging industry – arose specialized programs (and needs), trade associations and conferences, and a large job market to meet increased demands. One recent analysis estimated that the … Read more

Corporate Vote Suppression: A Counter-Response to Eric Robinson

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I appreciate the engagement by long-term pill observer Eric Robinson with my Corporate Vote Suppression piece. I am also glad that he agrees that the pill in The Williams Companies Shareholder Litigation ought to be struck down, though he narrowly confines his ground for supporting the Delaware Chancery Court’s decision to do so.  His invitation to re-examine Moran v. Household International shows how far the anti-activist pill has strayed from its initial justification (and limitation).  Moran sustained a “flip-over pill” against the threat of a front-loaded two-tier hostile bid and countenanced a 20 percent pill trigger because it represented the … Read more

Wachtell Lipton Discusses Myths About Advances in Stakeholder Governance

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Two years ago, the Business Roundtable (BRT) issued a “Statement on the Purpose of a Corporation,” signed by the CEOs of 184 major U.S. corporations, that rejected shareholder primacy, declared “a fundamental commitment to all [corporate] stakeholders” and linked corporate purpose to advancing and protecting the interests not just of shareholders, but of all corporate stakeholders.  The BRT’s statement reflected rapidly growing momentum towards a more inclusive corporate governance regime and promised to accelerate stakeholder governance by committing business leaders to the interests of employees, customers, suppliers, communities and the environment.

The BRT statement elevated the topic of stakeholder capitalism … Read more

Don’t Compound the Caremark Mistake by Extending It to ESG Oversight

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Since the foundational decision in In re Caremark Intern. Inc. Derivative Litig.,[1] Delaware corporate law has required boards of directors to establish reasonable legal compliance programs. Although Caremark has been applied almost exclusively with respect to law and accounting compliance, the original Caremark decision contemplated applying the oversight duty to the corporation’s “business performance.”[2] Accordingly, Caremark claims plausibly could lie in cases in which the corporation suffered losses, not due to a failure to comply with applicable laws, but rather due to lax risk management.

In fact, several commentators have argued that Caremark liability extends—or, at least, … Read more