Monthly Archives: February 2007

Insider Luck

This post is by Lucian Bebchuk of Harvard Law School.

The Harvard Magazine‘s new issue features Insider Luck, a piece I wrote on how stock-option grants were gamed and what to do about it.  In addition to providing an informal and accessible summary of the findings of Lucky Directors and Lucky CEOs, the two studies I co-authored with Yaniv Grinstein and Urs Peyer on the opportunistic timing of CEOs’ and independent directors’ grants, the piece considers the policy implications that past backdating practice have for future governance policies.  Even though significant backdating may belong to the past, its underlying causes are problems with which the corporate governance system must continue to wrestle, and the piece discusses how this should be done.

Recent Developments in the Caremark Litigation

This post is by Mark A. Morton of Potter Anderson & Corroon LLP. 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.

Potter Anderson & Corroon (Delaware) has recently posted a short Memorandum on Chancellor Chandler‘s recent decision in the Caremark litigation.  In addition to adding some texture to the continuing discussion concerning termination fees, the decision could have important implications for deal structuring.

It’s Simple Math (Even for University Presidents)

Editor’s Note: This post is by Broc Romanek of

Yesterday, I was quoted in this Indianapolis Star article as saying that “outside directors should devote 200 hours or more a year to adequately do their jobs.” For those following corporate governance, this shouldn’t be a bombshell, as others have thrown around 200 hours as the post-SOX time commitment for quite a while (see, e.g., the ABA’s Corporate Directors Guidebook).

The article focused on the current President of Purdue University, Dr. Martin C. Jischke, who serves on three boards. Dr. Jischke is quoted in the article as saying that my 200-hour estimate “sounded high.” Probably proving that I take blogging too seriously, I decided to analyze his three directorships:


Why is the Public Corporation in “Eclipse”?

Editor’s Note: This post is by Larry Ribstein of the University of Illinois College of Law and

Martin Lipton’s speech last week in Miami, Shareholder Activism and the ‘Eclipse of the Public Corporation’, noted yesterday, got a strong reaction from the NYT‘s Gretchen Morgenson on Sunday – she called it a “rant,” as I discussed on my blog. But while Lipton is clearly angry, his speech is no mere rant, and I’m going to give it the attention it deserves.

Briefly, Lipton identifies alien forces that have besieged the modern corporation and are threatening the functionality of its key institution–the board of directors.  Among other things, Lipton indicts:

–Activist investors who pressure the board to “manage for the short-term”;


Structural Changes and the Enforcement of Listing Standards

Editor’s Note: This post is by J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

A few weeks ago, the NASD announced that its members had approved the planned merger of regulatory functions with the NYSE.  The decision promises to consolidate broker-dealer regulation into a single self regulatory organization, solving, among other things, serious problems of redundancy, a topic addressed in a WSJ editorial written by two former chairs of the Securities and Exchange Commission, William Donaldson and Harvey Pitt

Little has been said, however, about the impact of the merger on the enforcement of listing standards.  Listing standards, particularly in a post-SOX world, have become a critical component of the governance process.  See Section 303A of the NYSE Listed Company Manual.   Following the merger, NYSE Regulation, the non-profit entity responsible for regulatory oversight, will lose most of its purpose and most of its employees (with approximately 470 of the 745 employees going to the consolidated new SRO). Left behind will be a rump organization with responsibility for little more than market surveillance and listed company compliance


Martin Lipton on Shareholder Activism

This post is by Theodore Mirvis and Paul Rowe of Wachtell, Lipton, Rosen & Katz.

Here is an important address by Marty LiptonShareholder Activism and the ‘Eclipse of the Public Corporation, which rightly belongs here in the belly of the beast.  Part of the title derives from Professor Michael Jensen‘s famous 1989 piece in the Harvard Business Review, proving at least that there is much back to the future in the field.

WLRK Memorandum on Stock Option Backdating

This post is by Theodore Mirvis and Paul Rowe of Wachtell, Lipton, Rosen & Katz. 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.

Here is a short Memorandum from Wachtell, Lipton, Rosen & Katz on Chancellor Chandler‘s recent decisions on stock option backdating.  The decisions, In re Tyson Foods, Inc. Consol. S’holder Litig., and Ryan v. Gifford, repay reading, even if you read them well after they were written.

Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?

This post is by Robert Sitkoff of Harvard Law School.

The Program on Corporate Governance recently posted my new discussion paper with Max Schanzenbach, Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?  Our Abstract describes the Article as follows:

This paper investigates the effect of changes in state prudent trust investment laws on asset allocation in noncommercial trusts.  The old prudent man rule favored “safe” investments and disfavored “speculation” in stock.  The new prudent investor rule directs trustees to craft an investment portfolio that fits the risk tolerance of the beneficiaries and the purpose of the trust.  Using state- and institution-level panel data from 1986 through 1997, we find that after adoption of the new prudent investor rule, institutional trustees held about 1.5 to 4.5 percentage points more stock at the expense of “safe” investments.  Our findings explain roughly 15 to 30 percent of the overall increase in stock holdings in the period studied.  We attribute most of the remaining increase to stock market appreciation.  We conclude that, even though trust fiduciary laws are nominally default rules, institutional trustees are nonetheless sensitive to changes in those rules.

The full Article can be accessed here.

A Controversial New Proposal for Regulating Foreign Financial-Service Providers

The Harvard International Law Journal has posted a striking new proposal by two senior SEC officials, Ethiopis Tafara and Robert J. Peterson, on how to regulate foreign financial service providers in U.S. capital markets.  A central issue in the debate over regulation of international financial service providers is whether and how domestic regulations should apply to foreign companies providing those services in domestic markets.  This article argues that, rather than apply SEC regulations to foreign financial-service providers, foreign stock exchanges and broker-dealers should be permitted to apply for an exemption from SEC registration based on compliance with substantively similar foreign regulations.  The authors (and Howell Jackson, in an accompanying analysis of the proposal) refer to their model as a “system of substituted compliance.”


The Small Business and Work Opportunity Act of 2007, “Severance” Pay, and President Bush on CEO Pay

Editor’s Note: This post is by Broc Romanek of

On February 1st, the Senate overwhelmingly approved the Small Business and Work Opportunity Act of 2007. Sections 206 (pg. 79) and 214 (pg. 98) include amendments to the Internal Revenue Code that would significantly curtail any employee’s ability to defer compensation in excess of $1 million per year under Section 409A.  In addition, the Act would broaden the definition of “covered employee” under Section 162(m) so as to apply the $1 million deduction limitation to payments made to a “covered employee” even after such individual ceases to serve in that capacity.  Note the elimination of the reference to the SEC’s disclosure rules in the 162(m) definition of “covered persons.”