Tag: short-termism

When theories collide: what happens when the shareholder preeminence theory meets the stakeholder theory?

Laurence Fink, the Chair and CEO of BlackRock, has issued his annual letter to public companies, entitled A Sense of Purpose.  As in prior years, Fink advocates enhanced shareholder engagement and a focus on long-term strategy development. (See this PubCo post and this PubCo post.) What’s new this year is that he is also advocating that companies recognize their responsibilities to stakeholders beyond just shareholders—to employees, customers and communities.  Holy smokes, Milton Friedman, what happened to maximizing shareholder value as the only valid responsibility of corporations?  

Does inclusion of executive compensation metrics related to corporate social responsibility lead to long-term value creation?

In this recent academic study, Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes, the authors examined the impact of the integration of elements of corporate social responsibility, such as environmental and social performance, into executive compensation performance criteria.  In the decision-making process, executives tend to gravitate toward the achievement of short-term goals and to respond more readily to more prominent direct stakeholders, such as customers and shareholders. But CSR metrics typically have a long-term pay-off and involve less direct stakeholders, such as the environment and the local community.  The question is: is the inclusion of CSR performance metrics in executive comp programs effective to motivate executives to achieve those longer-term CSR goals, engage with CSR stakeholders and enhance long-term value creation?

SEC nominees off “hold” and awaiting Senate confirmation

As has been widely reported, there are currently two nominees to fill the two empty slots at the SEC—from the Democratic side, Robert Jackson, a professor at Columbia Law School, and from the Republican side, Hester Peirce, a fellow at George Mason University.  However, Senator Tammy Baldwin had put a “hold” on the nominees back in November, as reported in the WSJ, until they provided “their views on whether regulators should rein in activist investors, stock buybacks and executive pay.”  Now that they have both responded to her questions, Baldwin has lifted her hold on the nominees, according to Law360, “clearing a hurdle for confirmation.” Their responses, although not exactly surprising, provide some insight into their views on these key issues. 

Does an unfavorable say-on-pay vote mean what it says?

Not really, according to this study by academics from the University of Pennsylvania Law, Rutgers Business and Berkeley Law Schools to be published in the Harvard Business Law Review. Say on pay was initiated under a Dodd-Frank mandate adopted against the backdrop of the 2008 financial crisis, largely in reaction to the public’s railing against the levels of compensation paid to some corporate executives despite poor performance by their companies, especially where those firms were viewed as contributors to the crisis itself. Say on pay was expected to help rein in excessive levels of compensation and, even though the vote was advisory only, ascribe some level of accountability to boards and compensation committees that set executive compensation levels.  So far, however, say-on-pay votes have served largely as confirmations of board decisions regarding executive compensation and not, in most cases, as the kind of rock-throwing exercises that many companies had feared and some governance activists had hoped. The study reported that, since 2011, the average annual percentage of say-on-pay votes in favor has exceeded 90%, while “the percentage of issuers with a failed say on pay vote has never exceeded 3% and, in 2016, that number dropped to just 1.7%.” The study examined what the few failed (or low) votes really meant.

Will a new securities exchange be effective to promote long-term value creation?

Many have recently lamented the decline in the number of IPOs and public companies generally (from about 8,000 in 1996 to about 4,000 now, according to EY), and numerous reasons have been offered in explanation, from regulatory burden to hedge-fund activism. (See this PubCo post and this PubCo post.)  In response, some companies are exploring different approaches to going public, leading to a recent resurgence in SPACs (see, e.g.,  this WSJ article), while others are flirting with the possibility of “direct listings,” which avoid the underwritten IPO process altogether (see, e.g., this article discussing the pending NYSE rule change to facilitate direct listings).   At the same time, companies are seeking ways to address some of the perceived afflictions associated with being public companies—including the pressures of short-termism, the risks of activist attacks and potential loss of control of companies’ fundamental mission—through dual-class structures and other approaches.  Changing dynamics are not, however, limited to companies.  And one of the most interesting proposals designed to address these issues is being introduced on completely different turf—a novel concept for a stock exchange, the Long-Term Stock Exchange. According to the LTSE blog, “[w]hile other proposed solutions target the IPO process, the LTSE’s mission is to transform the public company experience by relieving the short-term pressures that plague today’s businesses and laying the foundation for a healthier public market ecosystem.”

Deregulation? What deregulation? Two (persistent) campaigns for enhanced disclosure requirements

Notwithstanding the deregulatory emphasis of the current administration, two campaigns are currently being waged to convince the SEC to adopt new regulations mandating more disclosure—one related to human capital management and the other related to a frequent target, corporate political spending. Are these just pipe dreams? Is it time for a reality check? Or might there be some basis for believing that this SEC might act on these requests?