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The Opioid Crisis, CEO Pay, and Shareholder Activism

Re: Suraj Srinivasan

In 2020, AmerisourceBergen Corporation, a Fortune 50 company in the drug distribution industry, agreed to settle thousands of lawsuits filed nationwide against the company for its opioid distribution practices, which critics alleged had contributed to the opioid crisis in the US. The $6.6 billion global settlement caused a net loss larger than the cumulative net income earned during the tenure of the company’s CEO, which began in 2011. In addition, AmerisourceBergen’s legal and financial troubles were accompanied by shareholder demands aimed at driving corporate governance changes in companies in the opioid supply chain. Determined to hold the company’s leadership accountable, the shareholders launched a campaign in early 2021 to reject the pay packages of executives. Should the board reduce the executives’ pay, as of means of improving accountability? Or does punishing the AmerisourceBergen executives for paying the settlement ignore the larger issue of a business’s responsibility to society? Harvard Business School professor Suraj Srinivasan discusses executive compensation and shareholder activism in the context of the US opioid crisis in his case, “The Opioid Settlement and Controversy Over CEO Pay at AmerisourceBergen.”

Is Amazon a Retailer, a Tech Firm, or a Media Company? How AI Can Help Investors Decide

by Danielle Kost

More companies are bringing seemingly unrelated businesses together in new ways, challenging traditional stock categories. MarcAntonio Awada and Suraj Srinivasan discuss how applying machine learning to regulatory data could reveal new opportunities for investors.

Going Digital: Implications for Firm Value and Performance

by Wilbur Chen and Suraj Srinivasan

More and more nontechnology companies are adopting digital technologies like AI, data analytics, and machine learning. This study of the economic performance of nontech firms adopting new digital technologies finds a persistent future increase in valuation. However, investors only slowly incorporate the value implications of digital activities into prices. Nontech companies with senior executives with tech talent improve performance more than those without.

Political Influence and Merger Antitrust Reviews

by Mihir N. Mehta, Suraj Srinivasan, and Wanli Zhao

This paper uses a large sample of United States mergers between 1998 and 2010 to study how political connections help firms obtain favorable antitrust regulatory outcomes for mergers. Given that antitrust regulators are subject to congressional oversight, the authors predict and find evidence that outcomes systematically favor firms that are constituents of politicians serving on judiciary committees.

Investor Lawsuits Against Auditors Are Falling, and That's Bad News for Capital Markets

by Martha Lagace

It's becoming more difficult for investors to sue corporate auditors. The result? A weakening of trust in US capital markets, says Suraj Srinivasan. Open for comment; 0 Comments.

The Changing Landscape of Auditor Litigation and Its Implications for Audit Quality

by Colleen Honigsberg, Shivaram Rajgopal, and Suraj Srinivasan

Data from 1996 to 2016 shows that shareholder litigation against auditors has declined in recent years. Empirical evidence shows that Rule 10b-5, the Securities Act statute used for class action lawsuits, has lost its bite for use against auditors. This decline is driven, at least in part, by the US Supreme Court’s narrowing of liability standards. These findings suggest weakened shareholder protection with profound implications for investors.

Bank Boards: What Has Changed Since the Financial Crisis?

by Shiva Rajgopal, Suraj Srinivasan, and Forester Wong

Since the 2008 financial crisis, bank boards have not improved their cultural or gender diversity compared to other companies, nor are they better qualified than before the crisis. Outside directorships of bank directors and the extent of CEOs also being Chairman also remains the same. However, there is some evidence of better risk oversight both from managers and the board.

Two Million Fake Accounts: Sales Misconduct at Wells Fargo

Re: Suraj Srinivasan

Coming out of the financial crisis, Wells Fargo was one of the world’s most successful banks. But then its sales culture went wild, opening more than 2 million fake accounts. Suraj Srinivasan discusses what went wrong. Open for comment; 0 Comments.

The House Wants to Squelch Voices of ‘Small’ Shareholders. Research Shows Those Voices Matter.

by Carmen Nobel

Company management frequently seeks to exclude investor proposals even though some ultimately win shareholder support, according to new research by Eugene F. Soltes, Suraj Srinivasan, and Rajesh Vijayaraghavan. Open for comment; 0 Comments.

First Look at New Research and Ideas, September 12, 2017

Carmen Nobel

The need to consider self-managing organizations...The downside of positive information...The case of Signet Jewelers

Target's Expensive Cybersecurity Mistake

Re: Suraj Srinivasan

Professor Suraj Srinivasan explores one of the largest cyber breaches in history, analyzing why failures happen, who should be held accountable, and how preventing them is both a technical problem and a matter of organizational design. Open for comment; 0 Comments.

What Else Do Shareholders Want? Shareholder Proposals Contested by Firm Management

by Eugene F. Soltes, Suraj Srinivasan, and Rajesh Vijayaraghavan

Shareholder proposals are an important way for investors to communicate their demands to a firm’s management and board of directors. Here the authors gain insight into how such proposals can be excluded from a shareholder vote by management appealing to the Securities and Exchange Commission (SEC). Among the findings, firm managements seek to exclude almost half the proposals suggested by shareholders with nearly a quarter ultimately excluded with permission of the SEC.

June 14, 2016

Sean Silverthorne

Turning off the 'always available' office ... The good ideas from shareholders that managers ignore ... Who owns the whale?

Activist Directors: Determinants and Consequences

by Ian D. Gow, Sa-Pyung Sean Shin & Suraj Srinivasan

Hedge fund activism has become a significant phenomenon in recent years. Compared to traditional shareholder activists, for instance, hedge fund activists have been making a broader range of demands and adopting a wider range of tactics to have those demands met. Given the importance that the demand for board positions has in the activist game plan, the authors of this paper examine hedge fund activism through cases where candidates sponsored by the activists become directors of the target companies. Findings show that activist directors appear to be associated with significant strategic and operational changes in target firms. The study also shows evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment. The estimated effects are generally greater when activists obtain board representation, consistent with board representation being an important mechanism for bringing about the kinds of changes that activists often demand. Key concepts include: Activists are more likely to gain board seats at smaller firms and those with weaker stock price performance. Gaining board positions is an important mechanism that allows hedge fund activists to have an impact in ways that line up with the demands that they make of companies. Closed for comment; 0 Comments.

Counting Up the Effects of Sarbanes-Oxley

by Julia Hanna

More than a decade after its inception, the effects of Sarbanes-Oxley seem, if anything, beneficial, say Harvard's Suraj Srinivasan and John C. Coates. Why then do so many critics remain? Open for comment; 0 Comments.

Consequences to Directors of Shareholder Activism

by Ian D. Gow, Sa-Pyung Sean Shin & Suraj Srinivasan

Activism by hedge fund and other investors to improve governance and performance of companies has become a significant phenomenon in recent years. In this paper the authors examine a number of career consequences for directors when firms are subject to activist shareholder interventions. Examining 1,868 activism events—all publicly disclosed shareholder activism from 2004 to 2012 conducted by hedge funds or other major shareholders—the authors find that directors exit the board at a higher rate when their firms are targeted by activists. Even directors not specifically targeted by dissident shareholders are also likely to leave the board, as are directors at firms targeted by activism with no board-related demands, let alone a formal proxy fight. Overall, whether departure is voluntary, optimal, or otherwise, the evidence suggests that activism is associated with career consequences for directors. Key concepts include: Shareholder activism imposes career costs on directors. Shareholder activism in companies results in career consequences for directors even if the activism is not directed explicitly at board representation. Directors that receive a greater negative vote percentage in the year of shareholder activism are less likely to remain on the board in the year after activism. Directors are more likely to leave following poor performance when there is shareholder activism targeted at the company. However, there is no evidence of an impact of activism on director reputation as reflected in directorships on other boards. Even directly targeted directors experience no loss in other directorship. Closed for comment; 0 Comments.

Accountability of Independent Directors-Evidence from Firms Subject to Securities Litigation

by Francois Brochet & Suraj Srinivasan

Shareholders have two publicly visible means for holding directors accountable: They can sue directors and they can vote against director re-election. This paper examines accountability of independent directors when firms experience litigation for corporate financial fraud. Analyzing a sample of securities class-action lawsuits from 1996 to 2010, the authors present a fuller picture of the mechanisms that shareholders have to hold directors accountable and which directors they hold accountable. Results overall provide an empirical estimate of the extent of accountability that independent directors bear for corporate problems that lead to securities class-action litigation. These findings are useful for independent directors to assess the extent of risk they face from litigation, shareholder voting, and departure from boards of sued firms. While the percentage of named directors is small compared with the overall population of directors, individual directors can weigh their risk differently. From a policy perspective, the findings provide insight on the role that investors play in holding directors accountable for corporate performance. Key concepts include: About 11 percent of independent directors are named as defendants in securities lawsuits when the company they serve is sued. Audit committee directors-consistent with concerns about litigation exposure of these directors-and directors who sell shares during the class period are more likely to be sued. Shareholders in sued firms also hold independent directors accountable by voting against them, including a greater negative vote for named directors. Directors of sued firms, and especially those who are named, are also significantly more likely to lose their board seats in the sued firm. This effect is more pronounced after 2002 than before, possibly reflecting greater sensitivity towards the role of corporate directors in recent corporate scandals. Lawsuit outcomes vary when independent directors are named in lawsuits. When directors are named, cases are less likely to be dismissed, and they settle faster and for greater amounts. Some evidence points to the strategic naming of independent directors by the plaintiffs to gain bigger settlements. Closed for comment; 0 Comments.

Securities Litigation Risk for Foreign Companies Listed in the US

by Beiting Cheng, Suraj Srinivasan & Gwen Yu

In the US, securities class action litigation provides investors with a mechanism to hold companies and managers accountable for violations of securities laws. This study examines the incidence of securities class action litigation against foreign companies listed in the US and the mechanism driving the litigation risk. Looking at more than 2,000 securities class action lawsuits between 1996 and 2010, the authors find that significant litigation risk does exist for foreign issuers, but at rates considerably lower than for US companies. The authors also identify potential factors in lower litigation rates: 1) transaction costs and 2) the lower rate of trigger events such as accounting restatements, missing management forecasts, or sharp drops in stock prices that are needed in a lawsuit context to allege intentional and wrong prior disclosures on the part of managers. This suggests that while the effective enforcement of securities laws is constrained by transaction costs, availability of high quality information (that reveals potential misconduct) can contribute to a well-functioning litigation market for foreign firms listed in the US. Key concepts include: Foreign firms listed in US are only half as likely to have a securities class action lawsuit as comparable US firms. This lower rate is economically meaningful. Transaction costs of pursuing litigation against foreign firms play a role. Firms in countries that are farther from the US, have weaker judicial efficiency in the home country or have a weaker track record of prior US. acquisitions are less likely to be targeted by plaintiff investors and attorneys. Once a lawsuit-triggering event like an accounting restatement, missing management guidance, or a sharp stock price decline occurs, there is no difference in the litigation rates between a foreign and comparable US firm Lower litigation risk for foreign firms implies that, relative to US firms, foreign firms will face less frequent pressure to improve disclosure quality and corporate governance or make other corrective actions following a lawsuit. Closed for comment; 0 Comments.

Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

by Suraj Srinivasan, Aida Sijamic Wahid & Gwen Yu

The authors study restatements by foreign firms listed in the US, compare the extent of restatements by the foreign firms to that of domestic US firms, and examine the role of home country characteristics on the likelihood of the foreign firms restating their financials. When foreign firms list in the US, they become subject to the same accounting rules and regulations as US firms. However, results suggest that foreign firms listed in the US restate significantly less than comparable US firms. This difference is not because the foreign firms have superior accounting quality but because of opportunistic avoidance of issuing a restatement. The difference is driven primarily by firms originating from countries with weaker institutions. Overall, findings imply that restatements are a less accurate measure of the extent of reporting problems in an international setting compared to US domestic firms. Key concepts include: Foreign firms listed in the US are subject to a less rigorous monitoring and enforcement regime than domestic US firms. Weaker institutions in the firm's country of origin lower financial reporting quality of foreign firms accessing US markets, despite a common set of US rules and enforcement that apply to all foreign firms. An accurate reflection of accounting quality through restatement reporting is a necessary information mechanism for the US Securities and Exchange Commission (SEC) and investors to hold managers and auditors accountable. Fewer restatements can lead to a lower level of scrutiny, which is a concern from the point of view of investor protection. Closed for comment; 0 Comments.

Market Competition, Government Efficiency, and Profitability Around the World

by Paul M. Healy, George Serafeim, Suraj Srinivasan & Gwen Yu

Understanding whether and how corporate profitability mean reverts across countries is important for valuation purposes. This research by Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu suggests that firm performance persistence varies systematically. Country product, capital, and to a lesser extent labor market competition all affect the rate of mean reversion of corporate profits. Corporate profitability exhibits faster mean reversion in countries with more competitive factor markets. In contrast, government efficiency decreases the speed of mean reversion, but only when the level of market competition is held constant. The findings are useful to practitioners and scholars interested in understanding how country factors affect corporate profitability. Key concepts include: There is predictable variation in mean reversion in corporate performance across countries. At a practical level, valuation exercises can benefit from considering country as well as traditional firm and industry factors in settling on the speed with which superior or inferior profits are likely to mean revert. Different level of performance persistence in each country will affect firm-value through valuation multiples. Closed for comment; 0 Comments.