Tag: Oversight


Restraining Overconfident CEOs Through Improved Governance

Mark Humphery-Jenner is Senior Lecturer at the UNSW Business School. This post is based on the article Restraining overconfident CEOs through improved governance: Evidence from the Sarbanes-Oxley Act, authored by Mr. Humphery-Jenner, Suman Banerjee, Associate Professor in the Department of Economics and Finance at the University of Wyoming, and Vikram Nanda, Professor of Finance at Rutgers University.

Mark Humphery-Jenner is Senior Lecturer at the UNSW Business School. This post is based on the article Restraining overconfident CEOs through improved governance: Evidence from the Sarbanes-Oxley Act, authored by Mr. Humphery-Jenner, Suman Banerjee, Associate Professor in the Department of Economics and Finance at the University of Wyoming, and Vikram Nanda, Professor of Finance at Rutgers University.

In our recent paper, Restraining overconfident CEOs through improved governance: Evidence from the Sarbanes-Oxley Act, forthcoming in the Review of Financial Studies, we use the joint passage of the Sarbanes-Oxley Act and changes to the NYSE/NASDAQ listing rules to analyze the impact of improved governance in moderating the behavior of overconfident CEOs. Overconfidence can lead managers to overestimate returns and underestimate risk. The literature suggests that while some CEO overconfidence can benefit shareholders, a highly distorted view of risk-return profiles can destroy shareholder value. An intriguing question is whether there are ways to channel the drive and optimism of highly overconfident CEOs while curbing the extremes of risk-taking and over-investment associated with such overconfidence. We explore such a possibility in this paper. Specifically, we investigate whether appropriate restraints on CEO discretion and the introduction of diverse viewpoints on the board serve to moderate the actions of overconfident CEOs and, in the end, benefit shareholders.

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Preparing for the Regulatory Challenges of the 21st Century

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent remarks at the Georgia Law Review’s Annual Symposium, Financial Regulation: Reflections and Projections; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent remarks at the Georgia Law Review’s Annual Symposium, Financial Regulation: Reflections and Projections; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

During my tenure as an SEC Commissioner, our country’s economy has experienced extreme highs and lows. In fact, the country experienced the worst financial crisis since the Great Depression, followed by the current period of significant economic growth where the stock market has grown by around 165% from the low point of the financial crisis.

I have had a front-row seat to all of this, as I became an SEC Commissioner just weeks before the financial crisis hit our nation. As a result, I witnessed first-hand just how fragile our capital markets can be, and the need for a robust and effective SEC to protect them. First, let me provide a snapshot of what went on. I was sworn-in as an SEC Commissioner on July 31, 2008. Within a few weeks, on September 15, 2008, Lehman Brothers filed for bankruptcy. To give you a sense of its rapid decline, within 15 days, its share price went from $17.50 per share to virtually worthless. The demise of Lehman Brothers is often seen as the first in a rapid succession of events that led to an unimaginable market and liquidity crisis. These events included:

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Addressing the Lack of Transparency in the Security-Based Swap Market

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [January 14, 2015], the Commission considers rules that are designed to address the lack of transparency in the security-based swaps (SBS) market that substantially contributed to the 2008 financial crisis. These rules are the result of the Congressional mandate in the Dodd-Frank Act, which directed the SEC and the CFTC to create a regulatory framework to oversee this market.

The global derivatives market is huge, at an amount estimated to exceed $692 trillion worldwide—and more than $14 trillion represents transactions in SBS regulated by the SEC. The continuing lack of transparency and meaningful pricing information in the SBS market puts many investors at distinct disadvantages in negotiating transactions and understanding their risk exposures. In addition, as trillions of dollars have continued to trade in the OTC market, there is still no mandatory mechanism for regulators to obtain complete data about the potential exposure of individual financial institutions and the SBS market, in general.

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Corporate Governance Issues for 2015

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on an article that originally appeared in Practical Law The Journal. The views expressed in the post are those of Ms. Gregory and do not reflect the views of Sidley Austin LLP or its clients.

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on an article that originally appeared in Practical Law The Journal. The views expressed in the post are those of Ms. Gregory and do not reflect the views of Sidley Austin LLP or its clients.

Governance of public corporations continues to move in a more shareholder-centric direction. This is evidenced by the increasing corporate influence of shareholder engagement and activism, and shareholder proposals and votes. This trend is linked to the concentration of ownership in public and private pension funds and other institutional investors over the past 25 years, and has gained support from various federal legislative and regulatory initiatives. Most recently, it has been driven by the rise in hedge fund activism.

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The New York Fed: A “Captured” Regulator

The following post comes to us from Luigi Zingales, Professor of Finance at the University of Chicago, and is based on an op-ed by Mr. Zingales that was published today in Il Sole 24 Ore, which can be found here.

The following post comes to us from Luigi Zingales, Professor of Finance at the University of Chicago, and is based on an op-ed by Mr. Zingales that was published today in Il Sole 24 Ore, which can be found here.

The world of American finance has been invested by a new scandal. At its core, there is New York’s Federal Reserve; in other words, the institution that supervises America’s main banks. The scandal exploded because of the revelations emerged in a legal lawsuit about a layoff.

Carmen Segarra, a supervision lawyer, sued after being fired only seven months into her job. The New York Fed says it fired her due to poor performance. Segarra instead maintains that she was given the pink slip because she did not adapt to ‘Fed culture’—so permissive towards banks it regulates, almost to the point of collusion.

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Pre-Flight Checklist: 2014 Update

Eric Geringswald is Director of CSC® Publishing at Corporation Service Company. This post is an excerpt from the 2014 Edition of The Directors’ Handbook, by Thomas J. Dougherty of Skadden, Arps.

Eric Geringswald is Director of CSC® Publishing at Corporation Service Company. This post is an excerpt from the 2014 Edition of The Directors’ Handbook, by Thomas J. Dougherty of Skadden, Arps.

In this year’s Foreword, Dougherty differentiates the need for directors to focus on their core mission of informed oversight and vigilance rather than merely reacting to the constant influx of “daily corporate governance commentary,” and explores other front-burner issues, such as the marked increase in SEC enforcement actions and other recent SEC initiatives; the continuing trend of class action suits as de facto settlement instruments; proxy advisory firm priorities for directors; and new guidance from the Public Company Accounting Oversight Board (PCAOB) that recommends that audit committee directors discuss internal auditing deficiencies with their auditors.

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A Few Things Directors Should Know About the SEC

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Twentieth Annual Stanford Directors’ College; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Twentieth Annual Stanford Directors’ College; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The SEC today has about 4,200 employees, located in Washington and 11 regional offices across the country, including one in San Francisco that is very ably led by Regional Director Jina Choi, who is here [June 23, 2014]. Many of you have likely had some contact with our Division of Corporation Finance, which, among other things, has the responsibility to review your periodic filings and your securities offerings. Some of you that work for or represent a company that we oversee know our staff in our National Exam Program, and I imagine a few of your companies know something about our Enforcement Division staff. Our other major divisions are Investment Management, Trading and Markets and the Division of Economic and Risk Analysis.

So that is just a quick snapshot of the structure of the SEC and as you undoubtedly know, the SEC has a lot on its regulatory plate that is relevant to you—completion of the mandated rulemakings under the Dodd Frank Act and JOBS Act, adopting a final rule on money market funds, enhancing the structure and transparency of our equity and fixed income markets, reviewing the effectiveness of disclosures by public companies, to name just a few. But what you may not be as focused on is the mindset of the agency on some other things that are also relevant to you as directors.

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Board Oversight of Compliance Programs

The following post comes to us from Jeffrey M. Kaplan, partner at Kaplan & Walker LLP, and is based on an article by Mr. Kaplan and Rebecca Walker that first appeared in Compliance & Ethics Professional; the full article is available here.

The following post comes to us from Jeffrey M. Kaplan, partner at Kaplan & Walker LLP, and is based on an article by Mr. Kaplan and Rebecca Walker that first appeared in Compliance & Ethics Professional; the full article is available here.

Strong oversight by boards of directors—meaning typically by authorized board committees—of compliance-and-ethics (“C&E”) programs can be essential to promoting legal and ethical conduct within companies. In a variety of ways, board oversight should help to ensure that a program is effective and that directors and companies are otherwise meeting applicable C&E-related legal standards. Nonetheless, this is an area of uncertainty for many boards and managers, and can even be a struggle for some.

In Reporting to the Board on the Compliance and Ethics Program, published in the June issue of Compliance & Ethics Professional, we examine various aspects of such oversight from a law and good-practices perspective.

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Board Oversight of Sustainability Issues in the S&P 500

The following post comes to us from Jon Lukomnik of the IRRC Institute and is based on the summary of a report commissioned by the IRRC Institute and authored by Peter DeSimone of the Sustainable Investment Institute; the full report is available here.

The following post comes to us from Jon Lukomnik of the IRRC Institute and is based on the summary of a report commissioned by the IRRC Institute and authored by Peter DeSimone of the Sustainable Investment Institute; the full report is available here.

Board oversight has long been viewed as an effective mechanism to direct and monitor corporate management. For example, in the wake of accounting scandals last decade, the Sarbanes-Oxley Act of 2002 requires all publicly traded companies in the United States to have an audit committee comprised of independent directors, charged with establishing procedures for handling complaints regarding accounting or auditing matters and for the confidential submission by employees of concerns surrounding alleged fraud.

While sustainability has been a concern of corporations and investors for years, there has been little research focused on how boards oversee a company’s sustainability efforts. Sustainable and responsible investors also have seen board oversight as an effective way to encourage corporations to accelerate such efforts; they began filing shareholder proposals requesting board oversight of various sustainability issues in the 1970s, and both the numbers of resolutions and the support those resolutions have received have grown exponentially since. It is worth noting that one such model proposal, formulated by The Center for Political Accountability (CPA) and requesting board oversight of political spending in addition to key disclosure features, accounts for the vast majority of sustainability shareholder resolutions on board oversight and resulted in political spending being a top subtopic of board oversight duties.

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Crisis Management Lesson from Toyota and GM: “It’s Our Problem the Moment We Hear About It”

Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online, which is available here.

Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online, which is available here.

Delay in confronting crises is deadly. Corporate leaders must have processes for learning of important safety issues. Then they must seize control immediately and lead a systematic response. Crisis management is the ultimate stress test for the CEO and other top leaders of companies. The mantra for all leaders in crisis management must be: “It is our problem the moment we hear about it. We will be judged from that instant forward for everything we do—and don’t do.”

These are key lessons for leaders in all types of businesses from the front page stories about Toyota’s and GM’s separate, lengthy delays in responding promptly and fully to reports of deadly accidents possibly linked to product defects.

The news focus has been on regulatory investigations and enforcement relating to each company, but the ultimate question is why the company leaders didn’t forcefully address the possible defect issues when deaths started to occur.

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