Corporate governance - Vigil

A recent announcement by Corvex, an activist hedge fund, of its intention to nominate a full competing slate of directors for the upcoming annual meeting of The Williams Companies highlights a potential gap in advance notice bylaws that companies may wish to consider closing. With an impending deadline for nominations under Williams’ bylaws, Corvex announced that it would nominate 10 of its own employees to stand for election. These nominees were described as “placeholders” until Corvex could identify qualified candidates ahead of the annual meeting. The Corvex nominees, if elected, would commit to resign immediately following their election and replace themselves with the qualified independent candidates that are identified in the intervening months.

The Corvex tactic is untested and may not survive a court challenge. In the meantime companies may wish to consider modifications to their existing advance notice bylaws to require any nominees to represent that they currently intend to serve as directors for the term for which they are standing for election

Our research provides evidence on how hedge funds benefit from access to political information. We make use of a large data set on long-equity holdings of hedge funds from 1999 through 2012 as well as a database of federal lobbying expenditures in the U.S. to identify potential information transfers from lobbyists to hedge funds. If hedge funds gain an informational advantage through their connections with lobbyists, connected hedge funds should trade more actively in stocks that are sensitive to political decisions than non-connected funds. Connected hedge funds should also outperform non-connected hedge funds on their politically sensitive holdings. We refer to this as the information transfer hypothesis.

We have three important results: First, strong defensive tactics reduce market efficiency significantly. Our simulations suggest that approximately a $100 billion in deal value is lost each year in consequence of these tactics. Simulations are only suggestive and our simulated model likely overstates the welfare loss. Nevertheless, the result that defensive tactics cause economically significant welfare losses would stand even if our magnitude estimate is halved. Second, the defensive tactics level that maximizes target shareholder welfare is materially higher than the level that maximizes social welfare. These results also support a methodological claim: equilibrium analysis can illuminate regulatory issues regarding the market for corporate control. Third, our simulation supports the conclusion that an internal solution to a target board’s maximization problem exists: that is, for each target there is a delay facilitating defensive tactics level lower than allowed by the ability to fully block a hostile offer that maximizes the target’s expected return from a sale of the company.

Our new paper, Blockholders: a Survey of Theory and Evidence, surveys the role of large shareholders in corporate governance. We start by analyzing the underlying property rights of public corporations and blockholders. How are public corporations similar to other forms of private property and how are they different? We then define a blockholder by discussing what distinguishes it from an ordinary shareholder. Next, we present new evidence on the frequency, size, and board representation of blockholders in United States corporations and the resulting association with firm characteristics. We then develop a simple unifying model to present theories of blockholder governance through two channels. The first, traditional channel is direct intervention in a firm’s operations, otherwise known as “voice.” These theories have motivated empirical research on the determinants and consequences of activism. The second, more recent channel is selling one’s shares if the manager underperforms, otherwise known as “exit.”

Most directors disagree with criticisms of buyback programs. The two most common criticisms are that buybacks jeopardize corporate growth and that they lead to large, unjustified pay packages for executives. Directors, with few exceptions, say that their companies can afford both buybacks and adequate investment. Directors also reported that buybacks do not unjustly enrich senior executives, as compensation plans are adjusted for buybacks.

As of July 15, 2016, 78 proxy access shareholder proposals have been submitted to a vote at Russell 3000 companies during the 2016 proxy season, compared to 87 in 2015. Of the 78 proposals that have been voted on thus far this year, 41 proposals (or 52.6%) passed, while 37 proposals (or 47.4%) failed, with the primary factor determining the vote often being whether the company had previously adopted proxy access. So far this year, shareholder proposals submitted to a vote at Russell 3000 companies received average shareholder support of 51.1%, though average shareholder support rose to 64.2% among companies that had not yet adopted proxy access and dropped to 37.9% among companies that had already adopted some form of proxy access.

The 2010 Dodd-Frank Act provided shareholders of U.S. public corporations the right to vote on chief executive officers’ compensation, at least every three years. The so–called say on pay vote is advisory but was designed to curb overly generous executive pay packages.

Since 2011, the financial press, consultants and academic scholars have considered how shareholders make use of this right. According to the latest results of Semler Brossy[1], 93 percent of the Russell 3000 companies received say on pay support of more than 70% in 2016, and the failure rate dropped to 1.7 percent, the lowest level since 2011. Meanwhile, academic studies suggest that American companies are not cutting back on executive pay in this say on pay era.

While the impact of Trulia has been significant with the demise of the fast-track disclosure settlement route in Delaware, it has not spelled the end of deal litigation. Instead, it has set in motion a cascading set of developments that change (but do not eliminate) the risk profile of M&A litigation and create new pathways for the management of that risk.