This is now the fourth in the series of SEC-NYU dialogues, and I am pleased with the four topics that have been covered, as well as the quality of the discussions thus far. It is important that the SEC be able to take a forward-looking approach with respect to our securities markets—to keep up to date with key developments, and be alert to issues where regulation may be appropriate in the future. Hearing about new developments or theories—whether they require us to take specific action or not—is an important part of that process. At the end of the day, our ability to spot growing issues and head them off with thoughtful, informed, incremental regulation, or deregulation, will always be preferable to addressing problems retrospectively, including through enforcement.
We recently published a paper on SSRN, Governance Gone Wild: Epic Misbehavior at Uber Technologies, that evaluates governance and leadership challenges through the example of the private ride-sharing startup Uber.
Despite its importance, there is surprisingly little consensus among researchers about the organizational attributes that are critical for “good” corporate governance. Research generally shows that the structural features of a governance system—the size and structure of the board and the implementation of so-called best practices for audit, risk, compensation, and succession—do not have a reliable (positive or negative) impact on firm performance and outcomes. Some research finds that the human elements of governance—such as leadership, culture, and tone from the top—do influence outcomes, but these are difficult to measure and assess with accuracy.
JANA Partners LLC and the California State Teachers’ Retirement System (“we” or “us”) collectively own approximately $2 billion in value of shares of Apple Inc. (“Apple” or “you”). As shareholders, we recognize your unique role in the history of innovation and the fact that Apple is one of the most valuable brand names in the world. In partnership with experts including Dr. Michael Rich, founding director of the Center on Media and Child Health at Boston Children’s Hospital/Harvard Medical School Teaching Hospital and Associate Professor of Pediatrics at Harvard Medical School, and Professor Jean M. Twenge, psychologist at San Diego State University and author of the book iGen, we have reviewed the evidence and we believe there is a clear need for Apple to offer parents more choices and tools to help them ensure that young consumers are using your products in an optimal manner. By doing so, we believe Apple would once again be playing a pioneering role, this time by setting an example about the obligations of technology companies to their youngest customers. As a company that prides itself on values like inclusiveness, quality education, environmental protection, and supplier responsibility, Apple would also once again be showcasing the innovative spirit that made you the most valuable public company in the world. In fact, we believe that addressing this issue now will enhance long-term value for all shareholders, by creating more choices and options for your customers today and helping to protect the next generation of leaders, innovators, and customers tomorrow.
Over the past couple of years, we have seen traditional, actively managed funds, such as Neuberger Berman, borrow activist tactics and push for changes to accelerate increases in share prices. In parallel with this arguable trend toward convergence between actively managed funds and activist funds, a chasm appeared to be developing elsewhere in the investor landscape as pension and passive strategy funds increasingly focused on “social good” issues, while brand name activist funds remained primarily focused on nearer term financial performance and returns. But the activists desperately need the support of the pension and passive strategy funds, as evidenced by the proxy contests over the past year where support from these funds was neither predictable nor easily locked up. The announcement on January 6, 2018 by JANA Partners, a high profile activist fund, and CalSTRs, an outspoken pension fund, that they have teamed up to accumulate a $2 billion equity position in Apple for the purpose of launching a specific “social good” campaign is the strongest indication to date that the magnitude of assets under management focused on social good matters cannot be ignored and that even a successful activist fund like JANA needs to burnish its reputation in this area.
Posted by Wayne R. Guay and Kevin D. Chen (University of Pennsylvania), on Friday, January 12, 2018 Tags: Board composition, Board monitoring, Board performance, Boards of Directors, Director qualifications, Firm performance, Shareholder voting What the New Tax Rules Mean for M&A
Posted by Deborah L. Paul, T. Eiko Stange, and Joshua M. Holmes, Wachtell, Lipton, Rosen & Katz, on Friday, January 12, 2018 Tags: Cross-border transactions, Executive Compensation, Interest, International governance, Inversions, Mergers & acquisitions, Subsidiaries, Taxation Paying for Performance in Private Equity: Evidence from VC Partnerships
Posted by David T. Robinson (Duke University), on Saturday, January 13, 2018 Tags: Behavioral finance, Capital formation, Contracts, Due diligence, Fund performance, Incentives, Partnerships, Pay for performance, Private equity, Signaling, Venture capital firms Remarks at the Inaugural Meeting of the Fixed Income Market Structure Advisory Committee
Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Saturday, January 13, 2018 Tags: Bonds, Capital markets, Debt securities, Derivatives, Equity securities, Liquidity, Municipal securities, OTC derivatives, Retail investors, SEC, Securities regulation Strict Supervision, Bank Lending and Business Activity
Posted by Joao Granja and Christian Leuz (University of Chicago), on Sunday, January 14, 2018 Tags: Bank loans, Banks, Capital markets, Debt-equity ratio, Depository banking, FDIC, Financial crisis, Financial institutions, Financial reform, Financial regulation, OCC, OTS, Risk management, Securities lending, Thrifts What Do Investors Ask Managers Privately?
Posted by Eugene F. Soltes and Jihwon Park (Harvard Business School), on Monday, January 15, 2018 Tags: Behavioral finance, Disclosure, Fund managers, Information environment, Inside information, Investor horizons, Management, Managerial style, Regulation FD, Social networks How Transparent are Firms about their Corporate Venture Capital Investments?
Posted by Sophia J.W. Hamm (The Ohio State University), Michael J. Jung (New York University), and Min Park (The Ohio State University), on Tuesday, January 16, 2018 Tags: Acquisitions, Capital allocation, Disclosure, Financial reporting, Innovation, Private equity, R&D, Venture capital firms 2017 Year in Review: Securities Litigation and Regulation
Posted by Jason Halper, Kyle DeYoung and Adam Magid, Cadwalader, Wickersham and Taft LLP, on Tuesday, January 16, 2018 Tags: CHOICE Act, Class actions, Corporate fraud, Cryptocurrencies, Disgorgement, Dodd-Frank Act, Inside information, Insider trading, Liability standards, Materiality, Misconduct, Morrison v. National Australia, Omnicare, Salman, SEC, SEC enforcement, Section 10(b), Securities Act, Statute of limitations, Supreme Court, U.S. federal courts, Whistleblowers Delaware’s Prudent Approach to the Cleansing Effect of Stockholder Approval
Posted by William Savitt, Wachtell, Lipton, Rosen & Katz, on Tuesday, January 16, 2018 Tags: Controlling shareholders, Corwin, Delaware cases, Delaware law, Fiduciary duties, Merger litigation, Mergers & acquisitions, Shareholder suits, Shareholder voting, Tender offer Changes in ISS 2018 Compensation FAQs
Posted by BJ Firmacion and Torie Nilsen, Willis Towers Watson, on Wednesday, January 17, 2018 Tags: Accounting, Boards of Directors, Equity-based compensation, Executive Compensation, Firm performance, Institutional Investors, ISS, Management, Pay for performance, Performance measures, Proxy advisors, Shareholder voting Network Effects in Corporate Governance
Posted by Sarath Sanga (Northwestern University), on Wednesday, January 17, 2018 Tags: Boards of Directors, Delaware law, DGCL Section 102, Director liability, Duty of care, Fiduciary duties, Firm performance, Incorporations, Information environment, Peer effects, Public firms, State law Remarks at Ceremonial Swearing In of Commissioners Hester M. Peirce and Robert J. Jackson, Jr.
Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Wednesday, January 17, 2018 Tags: Financial regulation, SEC, Securities regulation A Sense of Purpose
Posted by Larry Fink, BlackRock, Inc., on Wednesday, January 17, 2018 Tags: Accountability, BlackRock, Board composition, Boards of Directors, Corporate Social Responsibility, Diversity, Engagement, ESG, Index funds, Institutional Investors, Long-Term value, Mutual funds, Stewardship The New Digital Wild West: Regulating the Explosion of Initial Coin Offerings
Posted by Randolph A. Robinson, II (University of Denver), on Thursday, January 18, 2018 Tags: Blockchain, Cryptocurrencies, Equity offerings, Equity securities, ICOs, SEC, Securities enforcement, Securities regulation BlackRock Supports Stakeholder Governance
Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Thursday, January 18, 2018 Tags: BlackRock, Boards of Directors, Corporate Social Responsibility, Engagement, Institutional Investors, Long-Term value, Mutual funds, Shareholder activism, Shareholder value, Short-termism, Stakeholders
BlackRock CEO, Larry Fink, who has been a leader in shaping corporate governance, has now firmly rejected Milton Friedman’s shareholder-primacy governance and embraced sustainability and stakeholder-focused governance. January 2018 BlackRock letter to CEOs.
The primacy of shareholder value as the exclusive objective of corporations, as articulated by Milton Friedman and then thoroughly embraced by Wall Street, has come under scrutiny by regulators, academics, politicians and even investors. While the corporate governance initiatives of the past year cannot be categorized as an abandonment of the shareholder primacy agenda, there are signs that academic commentators, legislators and some investors are looking at more nuanced and tempered approaches to creating shareholder value.
In his letter, Larry Fink says:
In 2017, initial coin offerings or ICOs raised a collective $4 billion for blockchain entities. While the rise of bitcoin has brought cryptocurrencies and the blockchain into recent media headlines, you could be forgiven if you are unfamiliar with concept of an ICO, as this funding mechanism only reached mainstream audiences in 2016 with the launch of an entity called The DAO. The DAO was formed as a decentralized venture capital fund, intended to fund the development of new blockchain companies and applications. But, before fully operational, The DAO suffered a cyber-attack that drained over one-third of its funds, putting an early end to the ambitious experiment. Although no longer operational, The DAO’s completely unregulated nine-figure fund raise would give rise to widespread duplication of this controversial corporate funding mechanism.
As BlackRock approaches its 30th anniversary this year, I have had the opportunity to reflect on the most pressing issues facing investors today and how BlackRock must adapt to serve our clients more effectively. It is a great privilege and responsibility to manage the assets clients have entrusted to us, most of which are invested for long-term goals such as retirement. As a fiduciary, BlackRock engages with companies to drive the sustainable, long-term growth that our clients need to meet their goals.
I hope that everyone had a very nice weekend and enjoyed the holiday on which we commemorate the life and contributions of Dr. Martin Luther King, Jr.
I note that this August will be the 55th anniversary of Dr. King’s “I Have A Dream” speech here in Washington and April will be the 50th anniversary of his death at age 39.
His lasting impact on America is remarkable and even more remarkable in the context of his short life with us. It is amazing the difference one person can make.
In preparation for our event today, and in the spirit of reflecting on milestones and the difference people can make, I spent some time over the weekend thinking about not only Dr. King and the important events in his life but also on the history of the SEC.
There are two canonical explanations:
(1) Legal quality. Firms are influenced by the intrinsic qualities of Delaware’s legal system. By some reasonable measure, its statutes, common law, and expert courts are “the best.”
(2) Network effects. Firms are influenced by each other’s corporate governance decisions. Why? Perhaps they interpret these decisions as proof of Delaware’s quality. Or perhaps they only want to follow the trend. In either case, this is a self-perpetuating rationale: Everyone goes to Delaware because everyone else is already there.
In a new paper, I analyze the incorporation histories of over 22,000 public companies from 1930 to 2010. I show that network effects were the principal force behind Delaware’s ascendance.
[In December 2017], Institutional Shareholder Services (ISS) released its complete FAQ compensation and equity plan documents along with detailed pay-for-performance mechanics for 2018.
While most of the changes were already disclosed by ISS in the 2018 proxy voting updates published in November (see “ISS 2018 policy changes reflect market feedback and draft policy expectations,” Executive Pay Matters, November 17, 2017), the FAQs further clarify these changes, particularly as they relate to the new pay-for-performance quantitative screen, as well as additional guidance on other elements of ISS policy. The FAQs also note how ISS will address the new CEO pay ratio disclosures in 2018.
In Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), the Delaware Supreme Court held that a non-controlling stockholder transaction approved by informed, unaffiliated stockholders is protected by the business judgement rule and that any lawsuit challenging such a transaction should be dismissed absent well-pleaded allegations of corporate waste. Recognizing that today’s sophisticated stockholder body can and does protect its own interests, Corwin held that in the great run of cases, stockholders—rather than plaintiffs’ lawyers or courts—should have the last word.
The securities litigation and regulatory landscape in 2017 defies simple categorization. Plaintiffs filed 226 new federal class actions in the first half of 2017, more than double the average rate over the last 20 years, and an additional 99 federal class actions in the third quarter of 2017. In contrast, new SEC enforcement proceedings declined. After staying on pace with the prior two years with 45 new enforcement actions against public company-related defendants in the first half of fiscal year 2017, the SEC filed only 17 new enforcement actions against public company-related defendants in the second half of the year. The apparent decrease in initiation of enforcement proceedings coincides with the arrival at the SEC of Chairman Walter J. Clayton, who has expressed the view that enforcement actions against issuers rather than individual wrongdoers too often punish the very investors they seek to protect.
Corporate venture capital (CVC) refers to direct minority equity investments made by established, publicly-traded firms in privately-held entrepreneurial ventures. CVC investing differs from pure venture capital investing in that financial returns are not the primary consideration, but rather, strategic gains are often the driving motivation to invest. While established firms in the technology, industrial, and healthcare sectors such as Google, General Electric, and Johnson & Johnson have set up CVC subsidiaries to invest billions of dollars in startups, younger firms such as Twitter with relatively smaller cash balances are starting to engage in venture capital investing as well. According to data from CB Insights, firms’ CVC investments in the U.S. were $17.9B in 2015 and $16.1B in 2016, involving 1,603 deals that accounted for nearly one-fifth of overall venture capital deals. CVC investments are now at the highest levels since the dot com era. The motivating research questions we are interested in examining in this setting are: 1) how transparent are firms about their CVC investments, and 2) is CVC investing a productive use of a firm’s capital resources?
Investors and managers of publicly traded firms spend a considerable amount of time speaking privately. According to the consultancy Ipreo, the average publicly traded firm conducts more than 100 one-on-one meetings annually with investors. While growing body of research provides evidence that these offline interactions offer investors in attendance opportunities to make more informed trading decisions. what actually goes on during these interactions has largely been elusive to outsiders.
In this paper, we seek to better understand the content of private manager-investor interactions by exploring over 1,200 questions posed by investors during private meetings with firm managers from two publicly traded firms. We acquired access to this unique field data by embedding a confederate with extensive investor relations experience in two firms from 2015 to 2016.
A recurring theme in banking crises is the public backlash against bank supervisors for their failure to take prompt and decisive action to unearth and correct problems of weak banks. The latest crisis is no exception. A recent poll by the Initiative on Global Markets (IGM) at the Booth School of Business shows that leading economists view “flawed financial sector regulation and supervision” as the most important factor contributing to the 2008 Global Financial Crisis. Perceived regulatory failures in the past often play an important role in justifying interventions that overhaul the regulatory oversight of the banking system, including tighter rules and stricter monitoring of financial institutions (e.g., Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989; Dodd-Frank Act of 2010). Despite the importance of such interventions, we have limited evidence on the economic trade-offs associated with reforms that aim to limit regulatory forbearance and promote stricter bank supervision.
I am delighted to welcome all of you to the inaugural meeting of the Fixed Income Market Structure Advisory Committee, or “FIMSAC” as many of us like to call it. This is a significant day for the Commission. There are a few matters of importance to discuss, and I will try to be efficient, as I know we are all eager to kick off today’s [January 11, 2018] discussion on bond market liquidity. 
To start, I would like to extend a warm welcome to our two new Commissioners, Robert Jackson and Hester Peirce. With Commissioners Stein and Piwowar, we have benefited from intellect, experience, perspective and energy, as well as ongoing commitment to our mission. My interactions with Rob and Hester have made it clear that we will have more of these important attributes.
Limited partner agreements in private equity typically focus on three elements of compensation: Management fees, carried interest, and the timing provisions that govern when general partners receive carried interest. By now, the standard conventions in most Limited Partnership Agreements (LPAs) are well understood by most observers and students of the industry—most investment managers (general partners, or GPs) charge 1.5% to 2.5% management fees to their investors (the limited partners, or LPs), and take a 20% carried interest in the net return in the exited investments, resulting in the “2 and 20” compensation structure that is commonplace in private equity.
President Trump has signed into law the most sweeping changes to business-related federal income tax in over three decades. The new law, referred to as the Tax Cuts and Jobs Act (the “Act”), is expected to have far-reaching implications for domestic and multinational businesses as well as domestic and cross-border transactions, impacting the structure, pricing and, in some cases, viability of broad categories of deals. Among other things, the Act lowers tax rates on corporations and income from pass-through entities, permits full expensing of certain property, imposes additional limits on the deduction of business interest and adopts certain features of a “territorial” tax regime. By lowering tax rates, the new law makes conducting business in the United States more attractive. But, to pay for the reduced rates, the Act includes numerous revenue-raising provisions as well. The changes will shift transaction dynamics in complex and potentially unanticipated ways that will unfold over time, raising challenging interpretive questions that taxpayers and advisors will be grappling with for years to come. By vastly reducing the incentive for U.S.-parented multinationals to hold cash offshore, the new law is expected to free up cash for M&A activity, capital expenditures, debt repayment or stock buybacks.
The job of a corporate director has become increasingly time consuming. The Wall Street Journal recently reported that the director of a public firm spends an average of 248 hours a year on each board, up from 191 hours in 2005. In light of this growing time demand, corporate directors face increasing investor scrutiny regarding the number of boards on which a given director sits. Prior research has examined the firm-level performance implications of corporate boards that have a large proportion of “busy” directors. However, there are several difficulties in these studies. In particular, firm-level analysis masks important heterogeneity in the time constraints and the expertise benefits of busy directors. For example, sitting on three boards might be excessive for a director with a full-time job, but it might be reasonable, or even optimal, for an individual who is retired. Also, certain firms (e.g., less experienced firms) may benefit more from the expertise and advising of a busy director. Furthermore, there may be omitted firm-level characteristics that are driving both director busyness and firm performance, which suggests that an observed positive (negative) association between director busyness and good (poor) firm performance does not necessarily imply that busy directors are beneficial (detrimental) to shareholders.