How do shareholders motivate managers to pursue innovations that result in patents when substantial potential costs exist to managers who do so? This question has taken on special importance as promoting these kinds of innovations has become a critical element of not only the competition between companies, but also the competition between nations. In our paper, Motivating Innovation in Newly Public Firms, forthcoming in the Journal of Financial Economics, we address this question by providing empirical tests of predictions arising from recent theoretical studies of this issue.
Posts Tagged ‘Public firms’
The Shareholder-Director Exchange (SDX™)  is a working group of leading independent directors and representatives from some of the largest and most influential long-term institutional investors.  SDX participants came together to discuss shareholder-director engagement and to use their collective experience to develop the SDX Protocol, a set of guidelines to provide a framework for shareholder-director engagements. While the decision to engage directly with investors should be made in consultation with or at the request of management, the 10-point SDX Protocol offers guidance to US public company boards and shareholders on when such engagement is appropriate and how to make these engagements valuable and effective.
Amid the recent uptick in U.S. IPO transactions to levels not seen since the heady days of 1999 and 2000, Davis Polk’s pipeline of deals remains robust, leading us to believe that strength in the U.S. IPO market will continue in the near future. With ongoing pressure on companies that are past the IPO stage to update or modify their corporate governance practices to align with the views of some shareholders and proxy advisory groups, we thought this would be a good time to review corporate governance practices of newly public companies to see if they have also shifted in recent years. Our survey is an update of our October 2011 survey and focuses on corporate governance at the time of the IPO for the 100 largest U.S. IPOs from September 2011 through October 2013. Results are presented separately for controlled companies and non-controlled companies in recognition of their different governance profiles.
At common law, an interested director was barred from participating in corporate decisions in which he had an interest, and therefore “disinterested” directors became desirable. This concept of the disinterested, director developed into the model of an “independent director” and was advocated by the Securities and Exchange Commission (SEC or Commission) and court decisions as a general ideal in a variety of situations. The SEC’s view of the need for independent directors should be understood in the context of Adolph Berle’s theory of the 1930s that shareholders had abdicated control of public corporations to corporate managers, and fiduciary duties needed to be imposed upon corporate boards in order to compensate for this loss of shareholder control. Berle’s writings laid the foundation for shareholder primacy as the theory of the firm, a theory embraced by the SEC, which viewed itself as a surrogate for investors.
The SEC has generally succeeded in imposing its corporate governance views in the wake of scandals. Following the sensitive payments enforcement program of the 1970s, the SEC embarked on an activist corporate governance reform program. During the merger and acquisition frenzy of the 1980s, the SEC used the Williams Act to foster the view that the market for corporate control constrained incompetent managers. After the bursting of the technology bubble in 2000, and the financial reporting scandals that ensued, the SEC was able to incorporate its views on independent directors into the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). Following the financial crisis of 2008, the SEC further enforced its views on the requirements for independent directors in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
The composition and behavior of securities markets and investors has changed drastically since the SEC was established in 1934. Yet, the SEC has persisted in its path-dependent view that independent directors, ever more stringently defined, should dominate the boards of public companies.
As market professionals, you obviously live the U.S. equity markets first hand, day in and day out. As an association, you have used your voice to focus attention on the value of our equity markets—an all-important engine for capital formation, job creation, and economic growth.
Like you, I believe that we must constantly strive to ensure that the U.S. equity markets continue to serve the interests of all investors. That mutual challenge must come fully of age and address today’s, not yesterday’s, markets. And today, I will speak about the path forward.
Beginning on August 1, 2013, the Delaware General Corporation Law will authorize the formation of public benefit corporations. The new provisions will allow entrepreneurs and investors to create for-profit Delaware corporations that are charged with promoting public benefits. These provisions modify the fiduciary duties of directors of PBCs by requiring them to balance such benefits with the economic interests of stockholders. In addition, the new provisions will require public benefit corporations to report to their stockholders with respect to the advancement of such non-stockholder interests.
Below are a few of the more salient elements of Delaware’s public benefit corporation legislation:
For a variety of practical and legal reasons, compensation to be paid in connection with the sale of a public company (which this article will refer to as “golden parachute compensation”) is best addressed well before an M&A transaction is being contemplated. There are a multitude of issues that are raised when designing these sorts of compensation arrangements, which generally focus on protecting a company’s executives if their employment is involuntarily terminated following a change in control, and below is a checklist to assist companies in approaching many of the important considerations.
A review of the CEO succession announcements made by S&P 500 companies in 2012 showed that they typically included details on when the succession would take effect, why the departing CEO is leaving, and whether the incoming CEO will be named board chairman; a statement by the departing CEO on his/her belief that the board has selected a qualified replacement; a statement by the lead independent director that the incoming CEO is the right choice for the company, given its current position, and thanking the departing CEO for his/her service; a statement from the incoming CEO that the existing management team is strong, the company is well positioned for the future, and expressing appreciation that the board has selected him/her as chief executive; and a description of the incoming CEO’s professional qualifications, and, if necessary, details on other director or senior management changes that will take place.
This post identifies and discusses a number of steps public companies may wish to consider regarding director nomination requirements and conduct in light of the heightened potential for arrival on the board of activist shareholder-nominated directors.
Increased Incidence of Nomination Proposals: Based on publicly reported information published by Activist Insight,  during 2012 activist shareholders threatened to initiate or initiated 58 director election proposals, and in 45 of them succeeded in electing at least one director either in an election contest or by agreement with the target’s board. During the first quarter of 2013, activist shareholders are reported by Activist Insight  to have threatened to initiate or initiated 36 director election proposals and in an election contest or by agreement in 13 of them succeeded in electing at least one director. By way of comparison, in the first quarter of 2012, activist shareholders threatened to initiate or initiated only 18 director election proposals.
In our paper, Externalities of Public Firm Presence: Evidence from Private Firms’ Investment Decisions, forthcoming in the Journal of Financial Economics, we examine whether greater public firm presence in an industry can increase the responsiveness of firms’ investment to investment opportunities by enriching the industry’s information environment, thereby reducing uncertainty. The intuition is that as more firms in an industry publicly disclose information and receive coverage by information intermediaries, a more complete perspective of the current economic environment and future outlook for the industry emerges. This reduction in industry uncertainty can then be used by peer firms in the industry to make more informed investment decisions. Our analysis is based on the theoretical predictions of investment under uncertainty, which indicates that when investment decisions are (even partially) irreversible, firms become cautious and hold back on investment in the face of uncertainty (e.g., Dixit and Pindyck, 1994). As a result, higher uncertainty leads to a reduction in firms’ responsiveness to investment opportunities (Bloom, Bond, and Van Reenen, 2007; Julio and Yook, 2012). If greater public firm presence leads to lower uncertainty in the industry, firms operating in that industry are likely to be more responsive to investment opportunities.
Using a novel data set of private U.S. firms created by Sageworks Inc., we investigate whether private firms operating in industries with greater public firm presence are more responsive to their investment opportunities than those operating in industries with lower public firm presence. Following Hubbard (1998), we interpret the responsiveness of investment to investment opportunities as a proxy for investment efficiency, where investment is measured as the change in gross fixed assets (Asker, Farre-Mensa, and Ljungqvist, 2012) and investment opportunities is measured using lagged sales growth (Wurgler, 2000; Whited, 2006; Bloom, Bond, and Van Reenen, 2007). We proxy for public firm presence in an industry using the percentage of industry sales that are generated by public firms.