Tag: International governance


Dodd-Frank Turns Five, What’s Next?

Daniel F.C. Crowley is a partner at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Crowley, Bruce J. HeimanSean P. Donovan-Smith, and Giovanni Campi.

The 2008 credit crisis was the beginning of an era of unprecedented government management of the capital markets. July 21, 2015 marked the fifth anniversary of the hallmark congressional response, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank resulted in an extraordinary revamp of the regulatory regime that governs the U.S. financial system and, consequently, has significant implications for the U.S. economy and the international financial system.

Members of Congress recognized the fifth anniversary of Dodd-Frank in markedly different ways. House Financial Services Committee Chairman Jeb Hensarling (R-TX) has held two of a series of three hearings to examine whether the United States is more prosperous, free, and stable five years after enactment of the law. In contrast, Senator Elizabeth Warren (D-MA)—one of the leading proponents of the law—and other members of Congress have criticized the slow pace of implementation by the regulatory agencies. Meanwhile, Senate Banking Committee Chairman Richard Shelby (R-AL) is advancing the “Financial Regulatory Improvement Act of 2015,” which seeks to amend a number of provisions of Dodd-Frank.

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Unfinished Reform in the Global Financial System

Lewis B. Kaden is John Harvey Gregory Lecturer on World Organizations, Harvard Law School, and Senior Fellow of the Mossavar-Rahmani Center on Business and Government, Harvard Kennedy School of Government. This post is based on Mr. Kaden’s paper, which was adapted from remarks delivered at Cambridge University on February 27, 2015 and at the Kennedy School of Government, Harvard University on April 9, 2015. The full paper is available for download here.

This paper offers a perspective on the challenges that the global financial system will face in the course of the next decade. While there has been significant progress since the financial crisis of 2007-2009 and the slow and uneven pressure of recovery and reform, a great deal of important work lies ahead. Part I briefly reviews, for the purpose of general background, the context and causes of the financial crisis. Part II identifies the key lessons to be learned from the crisis, and Part III outlines the major reforms adopted to date in the United States, Europe and the G-20. Finally, Part IV highlights what I regard as the principal ongoing issues affecting the financial system and suggests some approaches for dealing with them.

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Institutional Investors and Corporate Short-Termism

Robert C. Pozen is a Senior Lecturer at MIT Sloan School of Management and a Senior Fellow at the Brookings Institution. This post is based on an article forthcoming in the Financial Analysts Journal. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

Across the world, a clamor is rising against corporate short-termism—the undue attention to quarterly earnings at the expense of long-term sustainable growth. In one survey of chief financial officers, the majority of respondents reported that they would forgo current spending on profitable long-term projects to avoid missing earnings estimates for the upcoming quarter.

Critics of short-termism have singled out a set of culprits—activist hedge funds that acquire 1% or 2% of a company’s stock and then push hard for measures designed to boost the stock price quickly but unsustainably. The typical activist program involves raising dividends, increasing stock buybacks, or spinning off corporate divisions—usually accompanied by a request for board seats.

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Legal & General Calls for End to Quarterly Reporting

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Sabastian V. Niles. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

This summer, Legal & General Investment Management, a major European asset manager and global investor with over £700 billion in total assets under management, contacted the Boards of the London Stock Exchange’s 350 largest companies to support the discontinuation of company quarterly reporting, emphasizing that:

  • “[R]eporting which focuses on short-term performance is not necessarily conducive to building a sustainable business as it may steer management to focus more on short-term goals and away from future business drivers. We, therefore, support the recent regulatory change that removes the requirement for companies to disclose financial reports on a quarterly basis.”
  • “While each company is unique, we understand that providing the market with quarterly updates adds little value for companies that are operating in long-term business cycles. On the other hand, industries with shorter market cycles and companies in a highly competitive global market environment may choose to report more than twice a year.”
  • “Reducing the time spent on reporting that adds little to the business … can lead to more articulation of business strategies, market dynamics and innovation drivers, which are linked to key metrics that drive business performance and long-term shareholder value.

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Corporate Governance and Diversity

Aaron A. Dhir is an Associate Professor of Law at Osgoode Hall Law School in Toronto, Canada. The post is based on Professor Dhir’s book, Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press, 2015).

Earlier this year, Germany joined the ranks of countries such as Norway, France, Italy, Belgium, and Iceland by enacting a quota to increase the number of women in its corporate boardrooms. Starting in 2016, both genders must make-up at least 30 percent of specified German companies’ supervisory boards.

The news from Germany provoked decidedly negative reactions in major media outlets. In the New York Times, the Washington Post, and the Economist, critics questioned the soundness of pursuing positive discrimination in the corporate governance arena. The reality, however, is that we actually know very little about how corporate quotas have worked in practice. Advocates and detractors each suggest that these measures will alter the effectiveness and dynamics of firms in some way—whether for better or worse. But the speculation remains largely uncorroborated and our knowledge is incomplete at best.
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Foreign Antitakeover Regimes

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

The confluence of a number of overlapping factors—including an uptick in global and cross-border M&A activity, a resurgence in unsolicited takeover offers, the continued flow of tax inversion transactions, and the growth of activism in non-U.S. markets—means that U.S. companies and investors are more often facing unfamiliar takeover (and antitakeover) regimes as they evaluate and pursue offers for foreign targets. While experienced dealmakers are often well-versed in the nuances of friendly transactions with a foreign seller, the defenses available, and sometimes unavailable, to foreign companies facing unsolicited or hostile offers occasionally come as a surprise and complicate the pursuit or defense of these bids.

While a comprehensive survey of antitakeover regimes in various foreign jurisdictions is well beyond the scope of this post, it is instructive to highlight a number of examples where the regime—mandatory or permissive—departs significantly from U.S. practices, even in countries with well-developed legal systems and capital markets.

In a number of jurisdictions, the applicable takeover rules can be seen to facilitate, or even encourage, offerors in taking rejected overtures to the public shareholders:

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A Reassessment of the Clearing Mandate

Ilya Beylin is a Postdoctoral Research Scholar at Columbia Law School and the Editor-at-Large of the CLS Blue Sky Blog. This post is based on an article authored by Mr. Beylin.

Following the financial crisis, the G-20 nations committed to a raft of reforms for swap markets. These reforms are intended to mitigate systemic risk, and with it, the damage that failing financial institutions inflict on the financial sector and the broader economy. A core component of the reforms is the introduction of the “clearing mandate” for standardized swaps.

Clearing refers to the interposition of a clearinghouse, or central counterparty, between the two parties to a financial transaction. When a swap is cleared, the initial swap is extinguished and two new swaps are created in its place. The first is an identical swap between the first counterparty and the clearinghouse, and the second is another identical swap between the clearinghouse and the second counterparty. In this manner, absent default, parties make payments as they would if they had transacted bilaterally and the clearinghouse simply passes the payments between counterparties. However, when one of the counterparties to a transaction defaults, the presence of the clearinghouse as an intermediate counterparty shields the non-defaulting party from losses; that is because although the defaulting party may not pay the clearinghouse, the clearinghouse is still liable for, and makes, the payment to the remaining counterparty.

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An Interview with Chief Justice Strine

Judy Warner is editor-in-chief of NACD Directorship. This post is based on an interview between Ms. Warner and Delaware Supreme Court Chief Justice Leo E. Strine Jr. The full interview is available here. Research by Chief Justice Strine recently issued by the Program on Corporate Governance includes A Job is Not a Hobby: The Judicial Revival of Corporate Paternalism, discussed on the Forum here; and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, discussed on the Forum here. 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.

As your predecessor Chief Justice Myron Steele was stepping down in 2013, Directorship asked him if he had any words of advice for his successor. Chief Justice Steele suggested that his successor be prepared for crisis management because you never know what’s going to happen. So, I’m curious: have you had a crisis so far?

We’ve had a crisis. For example, we’re dealing very much this week with an emerging development that’s affecting our entire state government around the cost of health insurance for our employees. There are very tough choices that have to be made, that regardless of which choice is going to be made, it’s going to have an influence on the ability of our government to fund other priorities.

What you have to do in all these things is understand that life is sort of a series of planned emergencies. What we have tried to do is identify a set of priorities for future action that builds on existing achievements. I’m very fortunate I had a wonderful predecessor and friend in Myron Steele, who cares very much about our judiciary and worked very hard. I had a very high-quality predecessor, and I can build off that platform of making a very good organization.

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Comparative Corporate Law Casebook

Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law and Bocconi University.

Comparative Corporate Law is at the center of the scholarly debate, has a growing practical importance, and has become a staple course offered by most law schools and universities around the world, often in English independently of their location. The theoretical and practical reasons for this development are too obvious and well-known to be listed here. Yet there are few teaching resources that offer a systematic, in-depth, but also enjoyable analysis of the subject.

With our new book, Comparative Corporate Law (West Academic Press, 2015), we have tried to fill this gap. The book has been designed to be used in different legal systems and for different courses, primarily for law students, but not only: also students of business administration, economics, political science and international relationships might benefit from it. The book can be used in the basic course on corporations, as a complement to add a comparative and international dimension, and it can—more likely—be used in an upper-division course specifically dedicated to Comparative Corporate Law, or similar courses (Comparative Corporate Governance, Comparative Business Law, Comparative Corporate Finance, etc.).

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Fed’s Final G-SIB Surcharge Rule

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Roozbeh Alavi, Lance Auer, and Kevin Clarke.

On July 20th, the Federal Reserve Board (FRB) finalized its capital surcharge rule for the eight US global systemically important banks (G-SIBs). [1] The rule (which was proposed last December), implements the Basel Committee on Banking Supervision’s (BCBS) related standard in the US, but adds a second US-specific methodology that incorporates a charge against a G-SIB’s reliance on short-term wholesale funding (STWF). Under the final rule, a US G-SIB’s surcharge would be set as the higher number calculated under the BCBS methodology and under the US-specific methodology incorporating STWF. The surcharge will be phased in over three years (in 25% increments) beginning January 1, 2016. Along with the capital conservation buffer, the G-SIB surcharge sets a new risk-based capital bar for US G-SIBs. [2]

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