Yearly Archives: 2007

Warren Buffett’s Frustration Over CEO Pay Practices

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, March 5, 2007
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Editor’s Note: This post is by Broc Romanek of TheCorporateCounsel.net.

Always a fascinating read, here is Warren Buffett’s 23-page 2007 letter to shareholders.  Warren always has something to say about executive compensation practices, and this year’s letter is no exception.  On page 19, he notes that he has served as a director on 19 boards and he has been the “Typhoid Mary” of compensation committees:

“At only one company was I assigned to comp committee duty, and then I was promptly outvoted on the most crucial decision that we faced.  My ostracism has been peculiar, considering that I certainly haven’t lacked experience in setting CEO pay. At Berkshire, after all, I am a one-man compensation committee who determines the salaries and incentives for the CEOs of around 40 significant operating businesses.”

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The Goals and Promise of the Sarbanes-Oxley Act

Posted by John Coates, Harvard Law School, on
Monday, March 5, 2007
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This post is by John Coates of Harvard Law School.

The Journal of Economic Perspectives recently published my article, The Goals and Promise of the Sarbanes-Oxley Act.  The article responds to criticism of Sarbanes-Oxley as a costly regulatory overreaction, arguing that Sarbanes-Oxley, while imperfect, is likely to bring net long-term benefits.  The abstract describes the article as follows:

The primary goal of the Sarbanes-Oxley Act was to fix auditing of U.S. public companies, consistent with its full, official name: the Public Company Accounting Reform and Investor Protection Act of 2002.  By consensus, auditing had been working poorly, and increasingly so.  The most important, and most promising, part of Sarbanes-Oxley was the creation of a unique, quasi-public institution to oversee and regulate auditing, the Public Company Accounting Oversight Board (PCAOB).  In controversial section 404, the law also created new disclosure-based incentives for firms to spend money on internal controls, above increases that would have occurred after the corporate scandals of the early 2000s.

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Insider Luck

Posted by Lucian Bebchuk, Harvard Law School, on
Tuesday, February 27, 2007
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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

Posted by Mark A. Morton, Potter Anderson & Corroon LLP (Delaware), on
Monday, February 26, 2007
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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)

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, February 21, 2007
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Editor’s Note: This post is by Broc Romanek of TheCorporateCounsel.net.

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:

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Why is the Public Corporation in “Eclipse”?

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, February 15, 2007
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Editor’s Note: This post is by Larry Ribstein of the University of Illinois College of Law and www.ideoblog.org.

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”;

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Structural Changes and the Enforcement of Listing Standards

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, February 14, 2007
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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. 

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Martin Lipton on Shareholder Activism

Posted by Theodore Mirvis and Paul Rowe, Wachtell, Lipton, Rosen & Katz, on
Tuesday, February 13, 2007

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

Here is an important address by Marty Lipton, Shareholder 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

Posted by Theodore Mirvis and Paul Rowe, Wachtell, Lipton, Rosen & Katz, on
Monday, February 12, 2007
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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?

Posted by Robert Sitkoff, Harvard Law School, on
Thursday, February 8, 2007
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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.

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