Are corporations people? Are they entitled to the same “certain unalienable rights” as human beings – including free speech, as in the Supreme Court’s decision in Citizens United?  These and similar questions struck me as pretty important and presumably interesting. So when I heard about “We the Corporations – How American Businesses Won Their Civil Rights”, I picked it up.

The good news is that the history of corporate civil rights is interesting, and Adam Winkler (a professor at UCLA Law School) does a decent job of telling it.  The bad news is that his negative views regarding corporations infect the narrative and make me question the impartiality, if not the accuracy, of much of the book.

Early on, Professor Winkler discusses the monopolistic practices of Standard Oil and other late nineteenth- and early twentieth-century trusts.  So far, so good.  However, he then discusses the “migration” of Standard Oil from Ohio to New Jersey due to the increasingly pro-corporate laws of the Garden State.  He characterizes this development as a “race to the bottom” in corporate law.  Again, so far, so good – maybe.  But then he goes on to state that Delaware has become the jurisdiction of choice for so many corporations because it favors corporations, presumably to the detriment of their constituencies – possibly including society at large.  To be fair, that may have been an accurate characterization in the past.  However, to really be fair, Professor Winkler should have acknowledged that in recent decades Delaware has become far more judicious (all puns intended) as to the exercise of corporate rights than most states.  And he also should have acknowledged that a (the?) major reason so many corporations organize under Delaware law is the existence and wisdom of and predictability afforded by its corporate judicial system – i.e., its Court of Chancery and Supreme Court – rather than its lax laws.  (Ironically, the book ends with a lengthy discussion and citation of Delaware Supreme Court Chief Justice and former Chancellor Leo Strine, who strongly disagrees with the Citizens United decision.  One wonders if Chancellor Strine was aware of Professor Winkler’s views of his state’s laws.)

Continue Reading Interesting issue, weak execution: a review of “We the Corporations”, by Adam Winkler

It may be nice to be your own boss, but setting your own compensation – and, at least arguably, giving yourself excessive pay – may get you in trouble.  A number of boards of directors have found that out, as courts have given them judicial whacks upside the head for paying themselves too much.  Not surprisingly, shareholders have gotten on the bandwagon as well.

Executive compensation – at least for public companies – has to be scrutinized and blessed by independent directors and, since the advent of Say on Pay, approved by shareholders (albeit on a non-binding basis).  In contrast, directors have long set their own pay, with little or no scrutiny and no requirement for independent review, much less approval.  (Director plans generally must get shareholder approval if they provide for equity grants, but neither the overall director compensation program nor specific awards have to be approved.) Continue Reading Pigs and hogs — a note on director compensation

Each January, I depart from my focus on securities law and corporate governance matters to cite my top 10 books of the year gone by – five each in fiction and non-fiction.  As always, my top 10 list reflects books that I’ve read, rather than books that were published, during the year.

My reading tastes seem to have changed a tad in 2017.  Specifically, two of my fiction favorites were not at all the kind of books that I thought I’d like.  In the non-fiction area, if you’d asked me my favorite type of book at the beginning of the year, I doubt that I’d have mentioned biography and memoirs, yet they comprised three of my top non-fiction works.  I’ll also note that coming up with a fifth non-fiction favorite was a bit challenging, as only four really blew me away.

With that as prologue, here goes: Continue Reading My top 10 books of 2017

Loyal readers of this blog won’t be surprised that we’re disappointed that the SEC has again perfunctorily approved another proposal of the Public Company Accounting Oversight Board, or PCAOB.  (If you haven’t been following our blog, you can find our prior screeds here and here, among other places.)

The victim this time is the auditor report.  The new PCAOB standard requires an expansion of the auditor report to include the auditor’s tenure; a statement that the auditor is required to be independent; and some other language changes.  It also requires the report to be addressed to the company’s shareholders and directors.  But the plotz (no typo) de resistance is a requirement to disclose so-called “critical audit matters”.

Continue Reading A missed opportunity (or, when more is less)

 

With Chair Jay Clayton and Corp Fin Director Bill Hinman now in office for several months, the SEC seems to be gaining traction in a number of areas of interest to
public companies.

Pay Ratio Disclosures

As we noted in a Gunster E-Alert, on September 21, the SEC issued interpretations to assist companies in preparing the pay ratio disclosures called for under Item 402(u) of Regulation S-K.  The consensus (with which we agree) is that the interpretations will make it much easier for companies to prepare their ratios and related disclosures and hopefully to reduce litigation exposure associated with those disclosures.

Continue Reading Your tax dollars at work (at the SEC)

This is a first for The Securities Edge – a book review.  The book in question is The Chickenshit Club – Why the Justice Department Fails to Prosecute Executives by Jesse Eisinger.  Mr. Eisinger is a writer for Pro Publica.  He’s a very smart man and a good (even great) reporter; among other things, he’s won the Pulitzer Prize.  I met him once and was impressed by his intellect and commitment.

However, the book bothers me greatly, and that’s why I’ve decided to post this review.  As indicated by his title, he is concerned with the failure to prosecute executives, both generally and in connection with the financial collapse.  That concern is legitimate; many people – including people in business – share it, and some hold the failure at least partially responsible for our political situation today.  The problem with the book is that in Mr. Eisinger’s view there are heroes and villains and nothing in between; those who prosecute are good, and those who don’t (or who do so halfheartedly) are bad – and the businessmen themselves are the worst of all.

For example, among the people he idolizes is Stanley Sporkin, a retired USDC judge who previously served as the SEC’s Director of Enforcement. Mr. Sporkin’s integrity may be beyond question, but in Mr. Eisinger’s view, his judgment is (and was) as well.  Those of us who practiced during Mr. Sporkin’s tenure at Enforcement may have a different view.  Among other things, Mr. Sporkin was responsible for pursuing insider trading cases against Vincent Chiarella and Ray Dirks.   Mr. Eisinger lauds Mr. Sporkin for going after Mr. Chiarella – a typesetter for a financial printer who saw some juicy (nonpublic) information and traded on it.  Did he trade on the basis of inside information?  Yes, but at the end of the day he was a schnook who should have gotten a slap on the wrist rather than being subjected to a (literal) full court press by the federal government.  The courts apparently felt the same way, and, as courts often do, they found a way to let him off the hook by developing a strained approach to insider trading law that continues to haunt us today.  (Mr. Eisinger doesn’t mention the equally ill-advised insider trading prosecution of Ray Dirks, which also contributed to the current garbled state of affairs in insider trading law.)

Continue Reading Heroes and villains: A review of “The Chickenshit Club” by Jesse Eisinger

Earlier this month, the Federal Reserve proposed changes to its guidance on corporate governance for banking organizations.  The proposals suggest a new approach to corporate governance that could extend beyond the banking industry; among other things, they suggest that boards should spend more time on more important matters, such as strategy and risk tolerance, than on compliance box-ticking. However, taken as a whole, the proposals strike me as being something of a mixed bag.  And some of the positive aspects of the proposals are already being subjected to attacks.

The Good News

The good news is that the Fed seems to be acknowledging that the board’s role is that of oversight and that boards are spending far too much time micro-managing compliance and should focus on big picture items such as strategy and risk.  Those of us who speak with board members know that this has been a significant concern since the enactment of Dodd-Frank.

Continue Reading Federal Reserve governance guidance: the pendulum swings back (?)

In late July, S&P Dow Jones and FTSE Russell announced that they were changing or proposing to change the standards that govern whether a company is included in their indices.  Although their approaches differ, the changes would effectively bar most companies with differential voting rights from their indices, as follows:

  • In its July 31 announcement, S&P Dow Jones said that companies with multiple share classes will no longer be included in the indices comprising the S&P Composite 1500 – which includes the S&P 500, S&P MidCap 400 and S&P SmallCap 600. There are some exceptions; companies currently in these indices will be grandfathered, as will any newly public company spun off from a company currently included in any of the indices.
  • Five days earlier, FTSE Russell proposed to require more than 5% of a company’s voting rights – across all equity securities, whether or not listed or traded – to be held by “free float” holders to be eligible for inclusion in the FTSE Russell indices.

Continue Reading Class Acts: Stock Indices Bar Differential Voting Rights

monkey-557586_1920A few weeks ago, The Wall Street Journal reported that two former directors of Theranos – the embattled blood testing company – “did not follow up on public allegations that…the firm was relying on standard technology rather than its much-hyped proprietary device for most tests”.

The report states that the two board members in question – a former admiral and Secretary of State, respectively – were on the Theranos board when concerns about the company’s device were aired publicly.  However, they seem to have believed that it wasn’t their job to ask questions, at least not in the absence of some sort of proof that the concerns were valid.  The former admiral said he “did not have the information that would tell me that it’s true or not true”; the former Secretary of State said that “it didn’t occur to” him to ask questions, adding “[s]ince I didn’t know, I didn’t have anything to look into”. Continue Reading Ducks and monkeys

This time I’m not writing about disclosure or governance. Rather, I’m posting my annual list of my 10 favorite books. For those of you who haven’t seen these lists before, (1) I apologize if this seems hubristic (or “braggadocious”, if you will) – I do it because some folks have told me they like it; and (2) the list involves books that I happened to read (or re-read) in 2015, not necessarily books that were published in 2015.

I didn’t encounter lots of great fiction last year; for me, the great books were non-fiction. Let’s see if the trend continues in the New Year.

So here goes (in order of preference):

Continue Reading My top 10 for 2015