Two articles (among several) in a comprehensive proposal to revise EU corporate governance would have a significant beneficial impact if they were to be adopted in the United States. In large measure they mirror recommendations by Chief Justice Leo E. Strine, Jr., in two essays: Can We do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 Columbia Law Review 449 (Mar. 2014) and One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term? 66 Business Lawyer 1 (Nov. 2010).
Archive for the ‘Institutional Investors’ Category
As a practicing securities lawyer for more than thirty years, I have in the past advised boards of directors, including mutual fund boards, and I am well acquainted with the important work that you do. I also understand the essential role that independent directors play in ensuring good corporate governance. As fiduciaries, you play a critical role in setting the appropriate tone at the top and overseeing the funds’ business. Thus, I commend the Mutual Fund Directors Forum’s efforts in providing a platform for independent mutual fund directors to share ideas and best practices. Improving fund governance is vital to investor protection and maintaining the integrity of our financial markets.
We published this post last August. Since then there have been several developments that prompt us to revisit it; adding the first three paragraphs below.
First, Delaware Supreme Court Chief Justice Leo E. Strine, Jr. published a brilliant article in the Columbia Law Review, Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law in which he points out the serious defects in allowing short-term investors to override carefully considered judgments of the boards of directors of public corporations. Chief Justice Strine rejects the argument of the academic activists and activist hedge funds that shareholders should have the unfettered right to force corporations to maximize shareholder value in the short run. We embrace Chief Justice Strine’s reasoning and conclusions.
Across the country, public employee retirement systems are investing in companies that privatize public employee jobs. Such investments lead to reduced working hours and often job losses for current employees.  Although, in some circumstances, pension fund participants and beneficiaries may benefit from these investments, their actual economic interests might also be harmed by them, once the negative jobs impact is taken into account. But that impact is almost never taken into account. That’s because under the ascendant view of the fiduciary duty of loyalty, pension trustees owe their allegiance to the fund first, rather than to the fund’s participants and beneficiaries. Notwithstanding the fact that ERISA and state pension codes command trustees to invest, “solely in the interests of participants and beneficiaries and for the exclusive purpose of providing benefits,” the United States Department of Labor declared in 2008 that the plain text of the quoted language means that the interests of the plan come first.  Under this view, plan trustees should de facto ignore the potentially negative jobs impact of privatizing investments because that impact harms plan members, and not, purportedly, the plan itself. Thus, in the name of the duty of loyalty, the actual economic interests of plan members in plan investments are subverted to the interests of the plan itself (or, at a minimum, to an unduly constrained version of the plan’s interests that excludes lost employer and employee contributions). As a result, public pension plans make investments that harm the economic interests of their members. This turns the duty of loyalty on its head.
It has been argued that the best private equity partnerships do not increase fund size or fees to market-clearing levels. Instead they have rationed access to their funds to favor their most prestigious investors (e.g. Ivy League university endowments). Further, industry observers (e.g. Swensen (2000)) have often argued that endowments are better equipped to assess and evaluate emerging alternative investments, such as private equity, in which asymmetric information problems are especially severe. Lerner, Schoar, and Wongsunwai (2007) document that improved access as well as experience of investing in the private equity sector led endowments to outperform other institutional investors substantially during the 1990s. However, private equity is no longer an emerging, unfamiliar asset class, and the distribution of private equity fund returns has also changed over time. In particular, venture capital returns fell dramatically after the technology bust of the early 2000s.
The 2008 financial crisis and the slow recovery that has followed has brought further evidence tending to support the view that the structure of our corporate sector needs adjustment, and that its faults affect the competitiveness of our economy. The crisis has resulted, as would be expected, in a raft of new rules and regulations, which as usual have been implemented before there emerged any consensus about the nature of the problems. There has also been a vigorous competition of ideas over causes and remedies.
In a news alert released last week, the Shareholder Rights Project (SRP), working with SRP-represented investors, announced the high level of company responsiveness to engagements during the 2014 proxy season. In particular, as discussed in more detail below, major results obtained so far include the following:
- Following active engagement, about three-quarters of the S&P 500 and Fortune 500 companies that received declassification proposals for 2014 annual meetings from SRP-represented investors have already entered into agreements to move towards board declassification.
- This outcome reinforces the SRP’s expectation (announced in a blog post available here) that, by the end of 2014, the work of the SRP and SRP-represented investors will have resulted in about 100 board declassifications by S&P 500 and Fortune 500 companies.
Many corporate executives and board members view activist investors as little more than bullies with calculators: they seem to hunt in packs, force disruptive and risky changes, and use simplistic benchmarks as their call to action.
Yet their ranks have grown rapidly, and activist investors now attack even the largest and most successful companies. Worldwide, the assets managed by activist investors have increased sevenfold over the past decade, from $12 billion to $85 billion. Since 2005, the number of activist campaigns in the U.S. has increased 15 percent per year, reaching a total of 144 in 2012. These investors have pushed for the return of excess cash to shareholders at Apple; urged restructuring through spinoffs and divestitures at PepsiCo, Sony, Timken, and McGraw-Hill; and called for the replacement of senior management or board members at Abercrombie & Fitch, Yahoo, and Sotheby’s.
Following an increase in shareholder and investor activism beyond pure executive remuneration issues in the United Kingdom (UK) in 2013, with some 25 companies targeted for public campaigns, this post provides a summary of certain principles of English law and UK and European regulation applicable to UK listed public companies and their shareholders that are relevant to the expected further increase in activism in 2014. This post covers (i) stake-building; (ii) shareholders’ rights to require companies to hold general meetings; (iii) shareholders’ rights to propose resolutions at annual general meetings; and (iv) recent developments in these and related areas through raising and answering a number of relevant questions.
Shareholder activism, which has increasingly occupied headlines in recent years, continued along its sharp growth trajectory in 2013. The number of activists, as well as the amount of capital backing them, has increased substantially, as has the sophistication and effectiveness of their tactics.
In addition, last year was particularly noteworthy for the role shareholder activism played in the M&A sector, including a number of high-profile attacks on announced business combination transactions. In November 2013, we hosted a conference to discuss the rise of shareholder activism as it relates to M&A activity. We gathered a number of industry-leading experts to discuss significant recent developments and emerging trends and to explore tactics and responses from a company and an activist perspective. The panel discussions at this conference provided a number of interesting insights, observations and data points, and several of the key themes and highlights are outlined below.