Monthly Archives: February 2008

Say-on-Pay in the UK and Australia – and now in the US?

The post below comes to us from Peter Moon of Universities Superannuation Scheme, Phil Spathis of the Australia Council of Super Investors, and Keith Johnson of Reinhart Institutional Investor Services.

Verizon, Par Pharmaceutical and Aflac became the first US companies over the last year to adopt policies requiring an advisory vote of shareholders on company executive compensation practices. A network of over 70 institutional and individual investors lead by AFSCME and Walden Asset Management announced in January that adoption of this ‘say on pay’ policy is expected to be put on proxies at more than 90 US companies this year. With majority shareholder votes having been cast for similar resolutions at seven companies during 2007, say on pay will be one of the hottest issues in the upcoming US proxy season. In their article, Global Investors Laud Shareholder Votes on Executive Compensation, Peter Moon from the $65 billion Universities Superannuation Scheme pension fund in Britain, Phil Spathis from the $200 billion Australia Council of Super Investors and Keith Johnson from the University of Wisconsin Law School’s International Corporate Governance Initiative describe the impact that say on pay has had in other markets and discuss the benefits it could produce for both companies and shareholders in the United States.

On Being a Corporate Lawyer


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On Monday February 4, HLS Professor John C. Coates IV delivered his inaugural lecture “On Being a Corporate Lawyer” on the occasion of his appointment as the John F. Cogan, Jr. Professor of Law and Economics.

Coates’ lecture surveyed recent trends in corporate law practice—the field, he said, which continues to draw the majority of graduates of top schools. He noted that the leading corporate law firms have remained relatively stable and free from the kind of volatility seen in the investment banking sector over the past several decades, citing major banks that have vanished or been displaced. But, he said, some important changes are nevertheless on the way. Among them:

  • market forces will drive up the price for top-end corporate legal work;
  • law firms will increasingly develop new ways to structure their compensation for corporate deals, and they will rely less on the billable hour method, which does not accurately reflect the value that lawyers bring to major transactions;
  • law firm demand for top-quality entry-level corporate lawyers will intensify; one of the effects will be a corresponding spike in competition among law schools for corporate law professors, especially through lateral hiring.
  • Click here for a webcast of this event.

    CVS Caremark Adopts My Proposal and Amends its By-laws

    Editor’s Note: This post is from Lucian Bebchuk of Harvard Law School.

    CVS Caremark and I have reached an agreement under which the company adopted a by-law provision limiting the adoption of poison pills. The adopted by-law is based on a shareholder proposal to amend the company’s by-laws that I submitted for the company’s upcoming annual meeting. Following the agreement that the company and I reached, the company’s board adopted the new by-law earlier this week, and I withdrew my shareholder proposal. The amended by-laws of CVS, including the new section 8 of Article VI, were filed yesterday and are available here.

    Under the new by-law provision, any extension of a poison pill plan not ratified by the shareholders must be approved by at least 75% of the members of the board of directors, and a pill not so extended will expire one year after its adoption or last such extension.

    My shareholder proposal and the by-law adopted by CVS are based on a model by-law that was the subject of litigation and a court decision in the CA case, which led CA to abandon its attempt to exclude my proposal from the corporate ballot. An article about the litigation and my model by-law is available here.

    CVS is the third company to adopt a by-law provision based on this model by-law. The adoption by CVS was preceded by an adoption by Disney, which adopted a version of my proposal after the proposal won 57% of the votes in Disney’s annual meeting, as well as an adoption by Bristol-Myers Squibb.

    I commend the board of CVS for its adoption of the pill-limiting by-law. I hope that boards of other public companies will follow the example set by the boards of CVS, Disney, and Bristol-Myers and adopt similar by-law provisions.

    I would like to thank the law firm of Grant & Eisenhofer for its valuable legal advice and legal representation in connection with my shareholder proposals in general and the pill by-law proposals in particular. I also wish to thank Spotlight Capital Management for advising me on engagement with companies.

    The Significance of Mercier v. Inter-Tel

    Editor’s Note: This post is from Steven M. Haas of Hunton & Williams 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.

    I posted previously here on Vice Chancellor Strine’s decision in Mercier v. Inter-Tel (Delaware), Inc., and I continue to believe that it was probably the most important decision issued by the Delaware Court of Chancery in 2007. I recently wrote an article for the Securities Litigation Report discussing Inter-Tel and explaining its potential significance. In particular, Vice Chancellor Strine’s reasonableness standard in reviewing a decision to move a stockholders meeting date — if endorsed by the Delaware Supreme Court — would provide much clarity to practitioners and boards of directors. The decision is also notable for, among other things, its discussion of the roles of ISS and arbitrageurs in influencing merger votes.

    The article, which originally appeared in the November 2007 issue of the Securities Litigation Report, is available here and is being reproduced with the permission of Thomson West.

    A Practitioner’s Guide to Electronic Shareholder Forums

    This post is from Charles Nathan and Nicholas O’Keefe of Latham & Watkins LLP.

    Our firm has recently released a Corporate Governance Commentary providing an overview of the recent proxy rule amendments designed to encourage the use of electronic shareholder forums (for convenience, referred to as “e-forums”). The amendments were hastily adopted at a time when most of the attention was on proxy access. While the amendments were intended to benefit both companies and shareholders, it is activist investors who may be the most significant beneficiaries.

    The Commentary, entitled A Practitioner’s Guide to Electronic Shareholder Forums, explains how the amendments facilitate the use of e-forums, and what the potential risks and benefits to companies are. It explains that for a lot of companies, e-forums may serve as an additional channel of communication with shareholders for which the companies do not have a pressing need. For companies that do decide to construct or participate in e-forums, the companies will have to be careful that the e-forums are functionally useful and are not used for launching tirades against management. Perhaps more troubling for companies, e-forums will improve the ability of hedge funds and other activist investors to mobilize.

    The full Commentary is available online here.

    Forget Issuer Proxy Access and Focus on E-Proxy

    This post is from Jeffrey N. Gordon of Columbia Law School.

    I have just posted a forthcoming Vanderbilt Law Review article on issuer proxy access, Proxy Access in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy. The current draft is posted on SSRN here.

    The abstract is as follows:

    The current debate over shareholder access to the issuer’s proxy for the purpose of making director nomination is both overstated in its importance and misses the serious issue in question. The Securities and Exchange Commission’s new e-proxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via issuer proxy access and a freestanding proxy solicitation. The serious question relates to the appropriate disclosure required of a shareholder nominator no matter which avenue is used. Institutional investors and other shareholder activists should focus their energies on working through the mechanics of waging short-slate proxy contests using e-proxy solicitations.

    Activist institutions need to work out the disclosure package required under the existing proxy rules. Such disclosure may be tested (and refined) through litigation, but a standardized package should emerge relatively quickly that the institution could use in proxy contests without a control motive. Institutional investors need to become facile with the e-proxy model (including coordinating a practice for opting-in to web-access) and should appreciate the extent to which proxy advisory services will do much of the actual solicitation work. If institutions are unwilling to make the relatively modest investment to master the mechanics of e-proxy contest, both in their initiation as well as voting in support of them, then their role in corporate governance will necessarily be limited.

    Differences in Governance Practices Between U.S. and Foreign Firms

    This post is from René Stulz of Ohio State University.

    With my co-authors Reena Aggarwal (Georgetown), Isil Erel (Ohio State) and Rohan Williamson (Georgetown), I have recently completed a revision of the paper “Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences.” The paper is available at SSRN. The paper is now forthcoming at The Review of Financial Studies. The paper shows that foreign firms invest less in firm-level governance and that this lower investment is associated with lower valuations.

    Using the well-known definition of Shleifer and Vishny (1997), governance consists of the mechanisms which insure that minority shareholders receive an appropriate return on their investment. Governance depends both on country-level as well as firm-level mechanisms. The country-level governance mechanisms include a country’s laws, its culture and norms, and the institutions which enforce the laws. Firm-level or internal governance mechanisms are those that operate within the firm. Firm-level governance mechanisms that increase the power of minority shareholders to receive a return on their investment are costly, so that the adoption of such mechanisms by a firm is an investment. The payoffs from that investment differ across countries and across firms.

    The U.S. is recognized to have extremely high financial and economic development, to have strong investor protection, and to protect property rights well. Consequently, we would expect the internal governance of firms in the U.S. to come as close as possible to what the optimal internal governance of a firm would be in a foreign country if it were not constrained by weaker institutions and lower development than in the U.S. The internal governance of firms in the U.S. therefore provides a benchmark that can be used to evaluate the impact of different institutions and different development from the U.S. on governance choices and, through these choices, on firm value.

    On theoretical grounds, it is not clear whether the characteristics of the U.S. make firm-level investment in governance mechanisms that increase the power of minority shareholders more or less advantageous for U.S. firms relative to firms from countries which do not have the same high level of development and investor protection. One possibility is that foreign firms would invest less in firm-level governance if they were in the U.S. because firm-level governance and country-level investor protection are substitutes. An alternative possibility is that investment in firm-level governance is less productive in countries with poor economic development and weak investor protection than it is in the U.S., implying that firm-level governance and investor protection are complements.

    We find strong evidence that foreign firms invest less in internal governance mechanisms that increase the power of minority shareholders than comparable U.S. firms do. In other words, investment in firm-level governance is higher when a country becomes more economically and financially developed and better protects investor rights. Further, to the extent that institutional and development weaknesses reduce a foreign firm’s investment in corporate governance compared to a U.S. firm, we would expect the value of the foreign firm to be lower. As expected, we find that the value of foreign firms is negatively related to the magnitude of their governance investment shortfall relative to U.S. firms.

    To conduct our investigation, we need information about firm-level corporate governance attributes that increase the power of minority shareholders for a large number of firms across a large number of countries and we would like individual governance attributes to be assessed similarly across all these firms. We use the corporate governance attributes recorded by Institutional Shareholder Services (ISS). By doing so, we can analyze 44 common governance attributes for 2,234 non-U.S. firms and 5,296 U.S. firms covering 23 developed countries. We create a governance index making sure that the governance attributes included are relevant both for U.S. firms and foreign firms. We call it the GOV Index.

    To evaluate the governance a foreign firm would have if it were in the U.S., we use a propensity score matching method in order to match each foreign firm with a comparable U.S. firm. We then show that foreign firms generally have a lower GOV index, so that they give less power to minority shareholders, than if they were U.S. firms. We define the governance gap to be the difference between the governance index of a foreign firm and the governance index of a comparable U.S. firm. A firm with a positive governance gap has a higher value of the GOV index than its matching U.S. firm. Only 12.7% of foreign firms have a positive governance gap. Strikingly, 86.1% of these firms come from Canada and the U.K., so that firms from countries with similar investor protection as in the U.S. are the ones that are the most likely to invest more in governance than comparable U.S. firms. Such a result is inconsistent with the hypothesis that investor protection and internal governance mechanisms are substitutes.

    Having compared the governance of foreign and U.S. firms, we turn to the question of whether the governance gap helps explain a firm’s valuation. We find that the value of foreign firms is increasing in their GOV index. More importantly, perhaps, the lower the GOV index of a foreign firm compared to its matching U.S. firm, the lower the value of that foreign firm. We find that this result holds controlling for firm characteristics known to affect q and controlling for the endogeneity of the choice of governance mechanisms.

    If firm-level governance is more costly for foreign firms than for U.S. firms, we expect that the foreign firms comparable to the U.S. firms that benefit the most from investing in internal governance will find it optimal to invest less in governance than matching U.S. firms do and will suffer a loss of value as a result. We can therefore use regression analysis to investigate whether a foreign firm’s q is negatively related to the governance index value it would have in the U.S. We find that this is the case. Such a coefficient is not subject to an endogeneity bias because we are measuring the governance of a U.S. firm and the valuation of a foreign firm.

    In addition to investigating the value relevance of differences in the aggregate governance index between foreign firms and comparable U.S. firms, we also consider the value relevance of specific governance provisions. We focus on provisions that have attracted considerable attention in the literature and among policymakers. We find that firms that have an independent board, auditors that are ratified annually, and an audit committee comprised solely of outsiders, have a higher value when their U.S. matching firm has these governance attributes. In contrast, neither board size nor separation of the chairman and CEO functions are value relevant.

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