Category Archives: Corporate Governance

Opportunistic Proposals by Union Shareholders

Source: John G. Matsusaka, Oguzhan Ozbas, Irene Yi, University of Southern California, CLASS Research Paper No. CLASS15-25, October 8, 2015

From the abstract:
Effective corporate governance requires mechanisms that allow shareholders to influence corporate decisions. This paper investigates the use of shareholder proposals, an increasingly prominent governance mechanism, by labor unions. Activist union pension funds are subject to cross-pressures: they wish to increase fund returns to help beneficiaries but also to aid current union workers. We show theoretically that shareholder proposals can be used as bargaining chips in contract negotiations. Empirically, we use variation in the expiration of collective bargaining agreements to identify exogenous changes in the value of making proposals. We find that during contract negotiation years, unions increase the number of proposals they make by about one-quarter (and by about two-thirds during contentious negotiations), and change the subject of proposals to focus on matters personally costly to managers. We do not find similar changes in proposal behavior by nonunion shareholders. Opportunistic union proposals are also associated with better wage agreements for the union. The evidence suggests that some union proposals are intended to influence collective bargaining outcomes rather than maximize shareholder value, and that increasing proposal rights will not necessarily help shareholders at large if some shareholders use those rights to advance their private interests.

Fining McWalmart: Charging Employers for the Social Costs of Poverty Wages

Source: Erica Smiley, New Labor Forum, Vol. 24 no. 3, Fall 2015
(subscription required)

From the abstract:
… The “low-wage employer fee” is actually any strategy that attempts to win back the resources workers lose when large, low-wage corporations transfer their costs to the public while continuing to increase their own profits…. Once such a fee is implemented, low-wage employers can either negotiate directly with workers over wages and conditions of the industry or they can pay the low-wage employer fee that workers will appropriately allocate to subsidize the community’s assumed costs of low-wage work. How they pay the fee, and how often, would be set based on the local context—either in a lump sum or in intervals throughout the year. The hope is that it ultimately expands workers’ ability to collectively define industry standards—either directly with employers or around them via smartly crafted state interventions. ….

Offshore Shell Games 2015 – The Use of Offshore Tax Havens by Fortune 500 Companies

Source: Robert S. McIntyre, Richard Phillips, Phineas Baxandall, U.S. PIRG and Citizens for Tax Justice, 2015

From the summary:
U.S.-based multinational corporations are allowed to play by a different set of rules than small and domestic businesses or individuals when it comes to the tax code. Rather than paying their full share, many multinational corporations use accounting tricks to pretend for tax purposes that a substantial portion of their profits are generated in offshore tax havens, countries with minimal or no taxes where a company’s presence may be as little as a mailbox. Multinational corporations’ use of tax havens allows them to avoid an estimated $90 billion in federal income taxes each year.

Who’s Calling the Shots in State Politics? Corporations playing politics with ballot measures

Source: Liz Essley Whyte, Center for Public Integrity, September 2, 2015

….The Center for Public Integrity reviewed 55 publicly traded companies and top corporate givers to ballot measures and found nine instances of curious positions — positions taken even when the companies’ policies emphasize their business interests as the overriding criteria in doling out political contributions. The areas of interest were fairly diverse, but most seemed to focus on social issues or were aimed at fundamental changes to how state government operates….

….Some of the contributions that don’t line up with company policy appear to be aimed at building corporate political clout in the states. Companies are keen to make governors and legislatures as friendly as possible to business, according to Paul Kelly, a board member of the Association of Government Relations Professionals, which represents lobbyists. Sometimes that means contributing to issues that control how those politicians are elected…..

In Defense of Corporate Persons

Source: Kent Greenfield, Constitutional Commentary, Vol. 30, 2015

From the abstract:
This essay is a critique of this attack on corporate personhood. It explains that the corporate separateness – corporate “personhood” – is an important legal principle as a matter of corporate law. What’s more, as a matter of constitutional law, corporate “personhood” deserves a more nuanced analysis than has been typically offered in arguing in favor of an amendment to overturn Citizens United. Indeed, the concept of corporate “personhood” can in fact be marshaled in arguments against corporations being able to assert constitutional rights. In the nascent category of cases brought by corporations asserting rights of religious freedom, for example, corporations typically derivatively assert the religious claims of their shareholders. Attention to corporate “personhood” would lead courts to separate the claims of shareholders from those of the corporation itself, leading to a dismissal of corporate religious claims asserted on behalf of shareholders.

Finally, it proposes that the concerns motivating the movement against corporate personhood should be ameliorated with adjustments in corporate governance rather than constitutional law. In corporate law, what we need are changes in corporate governance to make corporations more like persons, not less. Unlike persons, corporations are expected to act if they have only one goal – the production of shareholder value. People must balance a range of obligations, both moral and legal. Requiring corporations to attend to a broader range of stakeholders would make corporations more like people, would make them better citizens, and would make their political participation less problematic.

How Corporate Governance Is Made: The Case of the Golden Leash

Source: Matthew D. Cain, Jill E. Fisch, Sean J. Griffith, Steven Davidoff Solomon, University of California, Berkeley – School of Law, UC Berkeley Public Law Research Paper No. 2635161, July 1, 2015

From the abstract:
This Article presents a case study of a corporate governance innovation — the incentive compensation arrangement for activist-nominated director candidates colloquially known as the “golden leash.” Golden leash compensation arrangements are a potentially valuable tool for activist shareholders in election contests. In response to their use, several issuers adopted bylaw provisions banning incentive compensation arrangements. Investors, in turn, viewed director adoption of golden leash bylaws as problematic and successfully pressured issuers to repeal them.

The study demonstrates how corporate governance provisions are developed and deployed, the sequential response of issuers and investors, and the central role played by governance intermediaries — activist investors, institutional advisors, and corporate law firms.

The golden leash also presents an opportunity to test the response of share prices to governance innovation. We conduct two cross-sectional event studies around key dates that affected the availability of the golden leash. Our core finding is that share prices of those firms facing activist intervention reacted positively to events that make golden leashes more available and negatively to events that make golden leashes less available. Moreover, we find that this governance innovation did not affect every firm in the same way. Only the share prices of those firms most likely to be subject to activist attention experienced statistically significant share price reactions.

Our research contributes to the debate over how corporate governance is made and its economic significance. Although we find that corporate governance provisions may be priced, at least in some circumstances, our study also suggests that corporate governance is a complex story involving the actions and reactions not merely of the firm and its shareholders but a variety of intermediaries and interest groups that have agendas of their own.

Good Jobs Score

Source: Zeynep Ton, Massachusetts Institute of Technology, 2015

Even in highly competitive industries, like low-cost retail, there are companies that choose a Good Jobs Strategy. They design and manage their operations in a way that creates value for their customers and investors while offering good jobs to their employees. The Good Jobs Strategy is a sustainable strategy in which everyone —customers, employees, and investors— wins.

How can an investor who is interested in sustainable companies identify which companies in a particular industry are following a Good Jobs Strategy? How can a customer who is interested in “voting with their wallet” identify which companies offer great value while taking care of their employees? Those are the questions that motivated us to create The Good Jobs Score.

Another motivation for creating The Good Jobs Score is to encourage companies to help develop and report standardized measures of employee satisfaction, customer satisfaction, and productivity. As we explain in the methodology section, the data used to develop the score are limited and have drawbacks.

Good Jobs Score 2015 for Public U.S. Food Retailers

good jobs score 2015

The Long-Term Effects of Hedge Fund Activism

Source: Lucian A. Bebchuk, Alon Brav, Wei Jiang, National Bureau of Economic Research (NBER), NBER Working Paper No. w21227, June 2015
(subscription required)

From the abstract:
We test the empirical validity of a claim that has been playing a central role in debates on corporate governance — the claim that interventions by activist hedge funds have a negative effect on the long-term shareholder value and corporate performance. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data. We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Our findings have significant implications for ongoing policy debates.

Walmart Web: How the World’s Biggest Corporation Secretly Uses Tax Havens to Dodge Taxes

Source: Frank Clemente, Marc Auerbach, Americans for Tax Fairness, June 2015

From the summary:
A groundbreaking report reveals that Walmart has built a vast, undisclosed network of 78 subsidiaries and branches in 15 overseas tax havens, which may be used to minimize foreign taxes where it has retail operations and to avoid U.S. tax on those foreign earnings. These secretive subsidiaries have never been subject to public scrutiny before. They have remained largely invisible, in part because Walmart fails to list them in its annual 10-K filings with the U.S. Securities and Exchange Commission (SEC). Walmart’s preferred tax haven is Luxembourg, dubbed a “magical fairyland” for corporations looking to shelter profits from taxation. The report, The Walmart Web: How the World’s Biggest Corporation Secretly Uses Tax Havens to Dodge Taxes, is the first-ever comprehensive documentation of the company’s use of tax havens. …
• Walmart has established a vast and relatively new web of subsidiaries in tax havens, while avoiding public disclosure of these subsidiaries. ….
• Luxembourg, dubbed a “magical fairyland” by one tax expert because of its ability to shelter profits from taxation, has become Walmart’s tax haven of choice. ….
• Walmart has made tax havens central to its growing International division, which accounts for about one-third of the company’s annual profits. ….
• There is evidence that Walmart uses its subsidiaries in tax havens to pursue well-known international tax-avoidance strategies: ….
• Walmart appears to be playing a long game – from tax deferral to profit windfall. ….
• U.S. and foreign authorities should investigate Walmart’s tax avoidance. ….

Walmart has 78 subsidiaries and branches and $76 billion in assets in 15 offshore tax havens, and zero stores.

chart of Walmart stores & subsidiaries

Key Findings
Press Release
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The Changing Landscape of Golden Parachutes in a Say-on-Pay World

Source: Cody Nelson, Towers Watson, Executive Compensation Bulletin, May 28, 2015

From the summary:
So-called golden parachute payments — severance paid to executives affected by a change in control (CIC) — have come under renewed scrutiny at the same time as the pace of mergers and acquisitions (M&A) has surged over the past few years. Indeed, it’s not uncommon to see headlines focusing on outgoing CEOs’ golden parachute amounts following merger announcements. (For more on recent M&A trends, see “Key Executive Compensation Issues to Address in M&A Due Diligence,” Executive Pay Matters, February 25, 2015.)

In the 2011 golden parachute report prepared by Towers Watson’s Executive Compensation Resources (ECR) unit, we wondered how long golden parachutes would be with us, given the sharper focus on these arrangements with the advent of say-on-pay and say-on-parachute votes. (See “Golden Parachutes: Still With Us, But for How Long?” Executive Compensation Bulletin, November 1, 2011, for our last report.) But, while golden parachutes clearly have remained a key component of the executive pay landscape, many features have changed over the past several years to make these arrangements more shareholder-friendly. To provide an overview of current parachute practices, ECR reviewed CIC severance provisions at Fortune 500 companies to identify common features and recent trends and changes in these programs. Since companies that don’t offer CIC benefits or enhanced severance for an involuntary termination after a change in control were excluded from our analysis, our report focuses on the 340 Fortune 500 companies that offer severance upon a CIC event. …