Category Archives: Comparative Corporate Governance & Regulation

Foreign Institutional Ownership and the Global Convergence of Financial Reporting

Vivian Fang is an Assistant Professor of Accounting at the University of Minnesota. This post based on an article by Professor Fang, Mark Maffett, Assistant Professor of Accounting at the University of Chicago, and Bohui Zhang, Associate Professor at the School of Banking and Finance, University of New South Wales.

In our recent paper, Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices, forthcoming in the Journal of Accounting Research, we examine the role of foreign institutional investors in the global convergence of financial reporting practices. Regulators frequently espouse comparability as a desirable characteristic of financial reporting to facilitate investment decision-making and allocation of capital. Over the past 15 years, significant regulatory effort has gone into promoting comparability, the most prominent example of which is the International Accounting Standards Board’s (IASB) push for global adoption of International Financial Reporting Standards (IFRS). However, recent research (e.g., Daske, Hail, Leuz, and Verdi [2008], Christensen, Hail, and Leuz [2013]) shows that mandating the use of a common set of accounting standards alone is unlikely to achieve financial reporting convergence.

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Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal)

Luca Enriques is Allen & Overy Professor of Corporate Law at University of Oxford, Faculty of Law.

Transactions between a corporation and a “related party” (a director, the dominant shareholder, or an affiliate of theirs) are a common instrument for those in control to divert value from a corporation, especially in countries with concentrated ownership. While direct evidence of value diversion via related party transactions (RPTs) is obviously hard to obtain, widespread use of RPTs has been observed for example in China (in the form of inter-company loans) and South Korea (also as a tool to transfer wealth from one generation of controllers to the next in avoidance of inheritance taxes), has been vividly reported for post-privatization Russia and Italy (where corporate scandals, such as Parmalat and, more recently, Fondiaria-Sai, often go together with significant RPT activity). Anecdotal evidence of value extraction via RPTs also exists with regard to the US (think of the Hollinger case and those reported in Atanasov et al.’s paper on law and tunneling, available here). Their (ab)use at Russian and East-Asian companies listed in the UK has recently prompted the UK Listing Authority to stiffen its already strict provisions on RPTs (see here; for a news report on RPTs at one of these East-Asian companies—Bumi, now renamed Asia Mineral Resources—see here).

In my article Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal), published in 16 European Business Organization Law Review 1 (2015), and available here (and here as a working paper), I provide a comparative and functional overview of how laws deal with RPTs and criticize a recent European Commission proposal for a harmonized EU regime on RPTs (see Article 9c of the Proposal for a Directive of the European Parliament and of the Council amending Directives 2007/36/EC and 2013/34/EU, available here).

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Guiding Principles of Good Governance

Stan Magidson is President and CEO of the Institute of Corporate Directors and Chair of the Global Network of Directors Institutes (GNDI). This post is based on a recent GNDI perspectives paper, available here.

The Global Network of Director Institutes (GNDI), the international network of director institutes, has issued a new perspectives paper to guide boards in looking at governance beyond legislative mandates.

The Guiding Principles of Good Governance were developed by GNDI as part of its commitment to provide leadership on governance issues for directors of all organisations to achieve a positive impact.

Aimed at providing a framework of rules and recommendations, the 13 principles laid out in the guideline cover a broad range of governance-related topics including disclosure of practices, independent leadership and relationship with management, among others.

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Why Run Away from the Evidence?

Bernard S. Sharfman is an adjunct professor of business law at the George Mason University School of Business. Related research from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here). An exchange of posts on the empirical evidence on hedge fund activism between Bebchuk, Brav and Jiang, who urged Wachtell Lipton not to run away from the evidence, and Martin Lipton, who responded to their posts, is available on the Forum here.

Back in September 2013, Lucian Bebchuk, Alon Brav and Wei Jiang posted Don’t Run Away from the Evidence: A Reply to Wachtell Lipton on this blog as a means to rebut the criticism they received on an early draft of their empirical study, The Long-Term Effects of Hedge Fund Activism. In a nutshell, their empirical study found hedge fund activism to create long-term value for both shareholders and the companies they invest in while the lawyers for Wachtell Lipton said the results meant nothing. Based on a recent blog posting by Martin Lipton, the most famous of all the Wachtell partners, Further Recognition of the Adverse Effects of Activist Hedge Funds, the post by Bebchuk, Brav and Jiang did not do anything to change their minds.

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Multiple Voting Shares and Private Ordering: Should Old Taboos Be Abolished? The Recent Italian Reform

The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

Italian Law No. 116 of 2014 introduced several rules designed to make corporate law more flexible, create incentives to corporations to go public, and might also allow controlling shareholders and directors to entrench themselves more effectively, limiting the risk of hostile acquisitions. The new rules, which became effective a few weeks ago, are both interesting and controversial. They can be seen as a response to the increase of regulatory competition in Europe, epitomized by the reincorporation of Chrysler-Fiat, which last year moved its registered seat from Italy to The Netherlands, thus becoming subject to Dutch law.

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Conduct of Business Regulation: A Survey and Comparative Analysis

Andrew Tuch is Associate Professor of Law at Washington University School of Law.

Although recent regulation and scholarship has focused on the financial stability and solvency of financial institutions, the business conduct of these institutions remains an issue of abiding regulatory concern. In a my chapter “Conduct of Business Regulation,” which is in the forthcoming Oxford Handbook of Financial Regulation, I provide a survey and comparative analysis of conduct of business (COB) regulation in the US, the EU, and Australia. COB regulation governs financial intermediaries’ conduct toward their clients; that is, toward the actors—whether individuals or institutions—with whom financial intermediaries transact in providing financial products and services. While the expression “conduct of business regulation” is not widely employed in the US, it is commonly used by international financial regulatory bodies and by financial regulators in many jurisdictions, including the Member States of the EU. In the US, COB regulation encompasses the regulation of broker-dealers and investment advisors under state and federal law; in the EU, the regulation of investment firms under MiFID I and the proposed MiFID II/ MiFIR regime; and in Australia, the regulation of financial services licensees and individual advisors under federal law. Generally speaking, these various financial intermediaries are in the business of providing securities-related services, including advice and recommendations.

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Comparative Study on Economics, Law and Regulation of Corporate Groups

The following post comes to us from Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg and was advisor inter alia for the European Commission, the German legislator and the Ministries of Finance and of Justice.

The phenomenon of the groups of companies is very common in modern corporate reality. The groups differ greatly as to structure, organization, and ownership. In the US, groups with 100-per cent-owned subsidiaries are common. In continental Europe, the parents usually own less of the subsidiaries, just enough to maintain control. In Germany and Italy pyramids are frequent, i.e., hierarchical groups with various layers of subsidiaries and subsidiaries of subsidiaries forming very complicated group nets. The empirical data on groups of companies are heterogeneous because they are collected for very different regulatory and other objectives, for example for antitrust and merger control regulation or for bank supervision.

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Limited Commitment and the Financial Value of Corporate Law

The following post comes to us from Martijn Cremers, Professor of Finance at the University of Notre Dame, and Simone Sepe of the College of Law at the University of Arizona. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

For at least 40 years, a large body of literature has debated the effects of state competition for corporate charters and the value of state corporate laws. The common assumption of these studies is that interstate competition affects the way state corporate laws respond to managerial moral hazard, i.e., the agency problem arising between shareholders and managers out of the separation of ownership from control (Jensen and Meckling, 1976). Nevertheless, scholars have been sharply divided about the importance of interstate competition, and particularly whether interstate competition fosters a “race to the top” that maximizes firm value (Winter, 1977; Easterbrook and Fischel, 1991; Romano, 1985, 1993) or a “race to the bottom” that pushes states to cater to managers at the expense of shareholders (Cary, 1974; Bebchuk, 1992; Bebchuk and Ferrell, 1999, 2001).

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Delaware and the Transformation of Corporate Governance

Brian Cheffins is Professor of Corporate Law at the University of Cambridge. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The corporate governance arrangements of U.S. public companies have been transformed over the past four decades. Independent directors now dominate boards (at least numerically), activism by shareholders has become more prevalent and executive pay has become more lucrative and more performance-oriented. The changes have been accompanied by a new nomenclature—the term “corporate governance” only came into general usage in the 1970s. How and why did this transformation of corporate governance come about? Delaware and the Transformation of Corporate Governance, which is based on the 2014 Francis G. Pileggi lecture, addresses these questions by assessing Delaware’s impact on key corporate governance trends.

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Corporate Governance Survey—2014 Proxy Season Results

The following post comes to us from David A. Bell, partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick publication titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies (2014 Proxy Season); the complete survey is available here.

Since 2003, Fenwick has collected a unique body of information on the corporate governance practices of publicly traded companies that is useful for Silicon Valley companies and publicly-traded technology and life science companies across the U.S. as well as public companies and their advisors generally. Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the high technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1]

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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Breeden
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    Daniel Fischel
    Stephen Fraidin
    Byron Georgiou
    Larry Hamdan
    Carl Icahn
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Barry Rosenstein
    Paul Rowe
    Rodman Ward