Monthly Archives: May 2008

My Resolution at ExxonMobil

This post is from Robert A.G. Monks of Lens Governance Advisors.

At EXXON’S Shareholders Meeting on Wednesday, Resolution #5 received 39.5% of the vote, marginally shy of last year’s 40%. I was relieved as we early learned that the company was seriously soliciting investors to vote against our resolution. The realities of the proxy process are that an issuer has vast advantage. There are many large holders who want to provide 401(k) or other services or who have analysts who want continued favorable access. It is difficult under existing conditions for such holders to consider seriously their fiduciary obligations. Under those conditions, it is gratifying that we can – in a year in which EXXON’s recorded financial performance may be the best ever recorded – hold steady at 40%. If this is a base, we can work on expanding it.

A letter in support of the proposal by myself and members of the Rockefeller family, filed with the SEC on May 13, 2008, is availabe here. A CNBC video featuring my discussing the proposal is available here. The text of the proposal was as follows:

“RESOLVED, that the shareholders urge the Board of Directors to take the necessary steps to amend the by-laws to require that, whenever possible and subject to any presently existing contractual obligations of the Company, an independent director shall serve as Chairman of the Board of Directors, and that the Chairman of the Board of Directors shall not concurrently serve as the Chief Executive Officer.”

A summary of the 2008 proxy proposal votes is available here.

Delaware’s Guidance Function

Editor’s Note: This post is from J.W. Verret of the George Mason University School of Law. 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 recently co-authored an article with Chief Justice Myron T. Steele of the Supreme Court of Delaware, “Delaware’s Guidance: Ensuring Equity for the Modern Witenagemot,” 2 Virginia Law & Business Review 189 (2007), previously explored here, and a subject of the Chief Justice’s keynote luncheon address to the
Business Law Section at the ABA’s 2007 annual meeting. This article was the subject of recent criticism from Jay Brown of Brown opposes the phenomenon we explored in which Delaware’s judges write articles, dicta, and give speeches on emerging issues in corporate governance, as well as participate as advisors to ABA Business Law Section committees. We called it Delaware’s “Guidance Function” and noted some of the more insightful examples from articles and dicta over the last twenty years. That someone of his stature would work on this important topic with a law clerk eager to get published is a testament to his 20 years of dedication mentoring law clerks and spent in tireless service to Delaware’s bench and bar. I should note that this post represents only my own personal response to Brown’s criticism and my understanding of Delaware’s Guidance Function.

Brown’s principle objection is that it represents an impermissible method for a judge to influence the law. He has, unfortunately, missed the point. Delaware’s Guidance Function is about informing Boards of Directors, and the attorneys of the Negotiated Acquisitions bar who advise them, of trends in corporate governance requiring special focus. Advice from neutral and informed jurists at the center of the maelstrom is valuable for Boards and corporate lawyers faced with inevitable uncertainty in the law that previously litigated fact patterns have yet to fully illuminate. Views of Delaware Judges in this medium are, as we were sure to note, clearly non-binding. Whether it is Justice Holmes’s The Common Law, former Chief Justice Rehnquist’s predictive insights into detention jurisprudence in All The Laws but One, or Judge Posner’s voluminous work on a variety of subjects, judges sharing insights outside the four corners of opinion writing has long been a respected pursuit central to American legal history.

Brown also begins from the assumption, central to his sensationalist “race to the bottom” blog, that Delaware’s law and judges favor management at the expense of shareholder value. Yet he noticeably avoids comment on the substance of the article. For instance, three of the more compelling examples of the Guidance Function, which we chose from among literally thousands of Westlaw citations to Delaware dicta and speeches, offer a general sense of our argument. Consider, for instance, former Chancellor Allen’s delphic observation in 1990 that “[I]n a sale context, counsel for a special committee must accept from the outset that as a practical matter she will have to demonstrate that the special committee’s process had integrity; that the committee was informed, energetic and committed in this transaction to the single goal of maximizing the shareholders’ interest….This is not a call to pay even greater attention to appearances; it is advice to abandon the theatrical and to accept and to implement the substance of an arm’s-length process.” William T. Allen, Independent Directors in MBO Transactions: Are They Fact or Fantasy?, 45 BUS. LAW. 2055, 2056 (1990). Kahn v. Lynch, decided in 1994, rewarded advisers who heeded the Chancellor’s call and spawned a line of cases representing one of the more litigated questions today. We also highlighted roughly a dozen other examples, including Chancellor Chandler’s admonitions about termination fees in Louisiana Mun. Police Employees’ Ret. Sys. v. Crawford and the compensation committee best practices offered by Justice Jacobs in the Disney case.

The Guidance Function has been embraced by Delaware’s judges, who travel around the world to remain engaged in the corporate governance debate. Indeed, the Chief Justice joined various experts on May 16, including former Senator Paul Sarbanes, to address the Institutional Investor Education Foundation’s Annual European Conference on vital issues of shareholder rights. The Delaware Guidance Function is a useful service working to the equal benefit of Boards of Directors, corporate counsel, and shareholders in Delaware corporations.

Seventh Circuit Rules on Mutual Fund Advisory Fees in Jones v. Harris Associates

As noted in an article by Floyd Norris of the New York Times, a panel of the Seventh Circuit Court of Appeals unanimously ruled in Jones v. Harris Associates that courts should play a limited role in reviewing fees charged by mutual fund advisors. In an opinion by Judge Frank Easterbrook, the court relied on what it called a “careful study” by Harvard Law School Professor John C. Coates IV and Columbia Business School Dean R. Glenn Hubbard that found that market forces and existing regulations provide powerful constrains on mutual fund fees, as well as an article by Ohio State Finance Professor René M. Stulz showing that hedge fund compensation regularly exceeds mutual fund fees.

The following summary and memorandum concerning the decision is by John Baumgardner of Sullivan & Cromwell LLP.

In Harris Assocs. v. Jones, No. 07-1624 (7th Cir. May 19, 2008), the United States Court of Appeals for the Seventh Circuit ruled that as long as a mutual fund investment adviser does not breach the fiduciary duty owed to shareholders by failing to disclose all of the pertinent facts or otherwise hindering the fund’s directors from negotiating a favorable price, no judicial review of the reasonableness of the adviser’s fee is required to dismiss a claim under Section 36(b) of the Investment Company Act of 1940. This decision rejects the long-followed Second Circuit decision in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982), which, while respecting the deliberations of independent directors, required courts to consider those deliberations in light of multiple factors in determining whether investment adviser fees were excessive. The Seventh Circuit examined the definition of fiduciary duty, rather than the amount of the fee itself, to evaluate whether the adviser complied with the duty created under Section 36(b), and held that a court should not substitute its judgment of what is “reasonable” for a fee determined by marketplace competition, absent lack of disclosure, deceit or some other breach of a fiduciary duty. (c) Sullivan & Cromwell LLP

A memorandum summarizing the decision is available here.

Explorations in Executive Compensation

This post is by Carol Bowie of the RiskMetrics Group Governance Institute.

Enhanced proxy pay disclosures, which the SEC believed would assist shareholders trying to assess the efficacy of executive compensation at their portfolio companies, have mainly underscored the elaborate and opaque nature of most pay programs. A new paper from RiskMetrics Group entitled Explorations in Executive Compensation aims to guide shareholders through the maze of terminology and complex processes being detailed in proxy statements and -– importantly -– proposes two innovative techniques that may help both investors and directors clarify disconnects between executives’ pay and shareowners’ interests.

You can view the paper, along with interactive tools that illustrate these techniques, at RMG is seeking a range of feedback to help refine the paper and the potential tools.

The first proposed technique focuses on peer group benchmarking -– long suspected of contributing to spiraling pay levels that cannot be linked to consistently superior returns. Academic literature has demonstrated the importance of benchmarking in the pay process (e.g., see Faulkender and Yang’s, “Inside the Black Box: The Role and Composition of Compensation Peer Groups.” Working Paper). But RMG may be the first to create a model to consistently measure the quality of a company’s peer group in terms of its homogeneity (relative to size and industry factors) as well as the company’s rank within the peer group relative to the benchmarks it targets – identifying where a company that is the smallest in the group targets pay at the seemingly innocuous median level, for example. Do such distortions contribute to pay inflation? The data are revealing.

The second technique brings a financial markets perspective to evaluating how a CEO’s pay package is or isn’t aligned, in terms of risk, with that of shareholders. Understanding that alignment -– or misalignment -– can identify companies where incentives may be motivating a top executive to pursue strategies (e.g., high- or low-risk) that don’t fit with a shareowner’s investment goals or even the board’s declared business strategy.

RMG’s project is ambitious in scope and intent — to help bring clarity to the often thorny and always complex issue of executive pay. But it epitomizes our objective of producing thought provoking research that creates constructive dialogue on the important corporate governance issues facing investors and corporations. The goal is to create a shared language and measures that market participants can use to create, evaluate, and communicate about executive pay systems. The project is offered in the spirit of RMG’s commitment to bringing transparency, expertise and access to all financial market participants, and a vital part of the project is the feedback we get from all market participants. We invite your comments at

SEC Proposes Revisions to Cross-Border Transaction Exemptions

This post is from Andrew R. Brownstein of Wachtell, Lipton, Rosen & Katz.

Together with Adam O. Emmerich, David A. Katz, James Cole, Jr. and Sabastian V. Niles, I have recently distributed a memorandum entitled Cross-Border M&A – SEC Proposes Revisions to Cross-Border Transaction Exemptions, which discusses proposed revisions by the SEC to the current regulatory regime for cross-border transactions. The revisions represent a modest advance toward clarifying existing exemptions and, if implemented, would provide US and non-US bidders with somewhat greater certainty and flexibility in structuring deals for non-US targets. The release also requests comments on a number of additional possible changes that could further broaden the exemptions. The proposed revisions do not address a key concern that under existing regulations foreign issuers are subject to potential exposure under the anti-fraud, anti-manipulation and civil liability provisions of the US federal securities laws for transactions with relatively modest US entanglements. The risk of such exposure has persuaded many international issuers to avoid US markets and US investors altogether, to the detriment of global capital markets in general and US investors in particular. The present amendments may thus be a way-station to a more comprehensive future revision of the cross-border rules.

The memorandum is available here.

Chancery Gives Victory to Freedom of Contract

This post is from Francis G.X. Pileggi of Eckert Seamans Cherin & Mellott, LLC. 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.

The Delaware Chancery Court recently issued its opinion in Fisk Ventures, LLC v. Segal, which I predict will be cited often by scholars and practitioners alike as part of the ongoing discussion about the difference between applying fiduciary duty concepts to LLCs–or not–as compared with the conventional application of those duties in the corporate context.

This case began as an action to dissolve an LLC pursuant to 6 Del. C. Sections 18-801 and 802 but this decision does not address those issues. Rather, the court grants motions to dismiss filed by the Third-party Respondents based on a personal jurisdiction argument and failure to state a claim. (Thus, the court was not called upon yet to address the dissolution issues.)

The third-party claims that the court addressed alleged that the third-party defendants: (i) breached the LLC Agreement; (ii) breached the implied covenant of good faith and fair dealing; and (iii) breached fiduciary duties, among other allegations.

[Although the court granted a motion to dismiss based on lack of personal jurisdiction pursuant to 10 Del. C. Section 3104 and 6 Del C. Section 18-109, because the other issues decided have much more far-reaching importance, I won’t spend any time on the personal jurisdiction discussion, which otherwise is noteworthy in its own right.]

Though clearly separated in the structure of the opinion, the court’s discussion of the breach of contract claim and the breach of fiduciary duty and implied duty claims was somewhat, of necessity, interwoven. The court began its analysis with basic contract principles and the truism that LLCs are creatures of contract, and that a prerequisite to any breach of contract analysis, is to determine if there is a duty in the document that has been breached.

In this regard, the court cites in footnote 34 to Delaware Supreme Court Chief Justice Myron Steele’s article entitled: Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 Del. J. Corp. L. 1, 4 (2007)(“Courts should recognize the parties’ freedom of choice exercised by contract and should not superimpose an overlay of common law fiduciary duties…”)

Importantly, the court found no provision in the LLC Agreement at issue that: “create[d] a code of conduct for all members; on the contrary, most of those sections expressly claim to limit or waive liability.”

Here is the money quote:

“There is no basis in the language of the LLC Agreement for Segal’s contention that all members were bound by a code of conduct, but, even if there were, this Court could not enforce such a code because there is no limit whatsoever to its applicability”.

The “implied covenant of good faith and fair dealing” claim was carefully examined and dispatched with one of the more lucid and cogent treatments I can recall of this amorphous cause of action.

Finally, the breach of fiduciary duty claim was confronted by first reciting the provisions of the Delaware LLC Act at Section 18-1101(c) that allow for complete elimination of all fiduciary duties as part of an LLC Agreement. The court read the parties’ LLC Agreement in this case to eliminate fiduciary duties because it flatly stated that:

“…members have no duties other than those expressly articulated in the Agreement. Because the Agreement does not expressly articulate fiduciary obligations, they are eliminated.”

The case is available here.

Dodge v. Ford and the Proper Purpose of a Corporation

Editor’s Note: This post is by Professor Lynn Stout of UCLA School of Law and Professor Jonathan Macey of Yale Law School.

In the latest issue of the Virginia Law & Business Review, we debate whether the classic case of Dodge v. Ford, and its claim that maximizing shareholder wealth is the proper purpose of a business corporation, deserves a place in the modern legal canon. Lynn argues that Dodge v. Ford is bad law, at least when cited for the principle that corporate directors should maximize shareholder wealth. As a positive matter, Lynn suggests, no modern jurisdiction follows this rule, and as a normative matter, advances in economic theory suggest that the goal of shareholder wealth maximization is at best inefficient and at worst incoherent. Jon argues that shareholder wealth maximization is both conceptually coherent and consistent with economic theory, and that Dodge v. Ford can be used to illustrate the fact that shareholder wealth maximization is both a valid goal for corporate law and an ethical requirement, even in contexts in which enforceability is practically impossible.

The debate can be found here.


This post is from Robert A.G. Monks of Lens Governance Advisors.

I have enjoyed many reviews of CORPOCRACY but none pleases me as much as the following from a teacher in Maine:

“Monks, internationally known governance guru, of the stature of Peter Drucker, author of Corpocracy is right now being quoted on NPR/MPBN (Wednesday last) on Exxon’s promotion of false science.

Please show me that you are aware of him. (I don’t know him well, but I just sent him a copy of this and you can reach him at that email.) I suggest you use it.

NOTE his sub title:

Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine — And How to Get It Back by Robert A. G. Monks

His book includes a sensational expose of Lewis Powell, Justice of the Supreme Court, whom he labels the “consiglieri” of the corpocracy and its “godfather”, as author of the “Powell Memo.” And he knew Powell as a lawyer whom he hired in one corporate business matter because he knew he was the best!

When are you going to get him interviewed for three hours as he deserves? HE IS SPEAKING DIRCTLY TO THE CURRENT FINANCIALIZED ECONOMIC DISASTER!
John C Bogle and he agree. As you will see, he, like Bogle, knows his business. MONKS is even more of a heavyweight and has better more far seeing recommendations.
Worth your attention. VERY MUCH SO!

Maybe Bogle would interview him for you. Or Lawrence Mitchell of GWU right down there in DC, my old haunts in your neighborhood, when I was a speechwriter for the head of SBA, Howard J Samuels.

I am teaching MONKS in my new course at Senior College in Rockland on The Corporation and the New Capitalisms. The registrants love it! “

Who Monitors the Monitor?

This post by Praveen Kumar and K. Sivaramakrishnan at the University of Houston is part of the series of posts on corporate governance articles accepted for publication in prominent Finance Journals.

Our forthcoming article in the Review of Financial Studies entitled “Who Monitors the Monitor? The Effect of Board Independence on Executive Compensation and Firm Value” evaluates the efficacy of recent corporate governance reforms that focus on board independence and encourage equity ownership by directors. For instance, both the NYSE and the NASDAQ now require that a majority of directors on corporate boards should be independent, and that the audit and compensation sub-committees should be made up entirely of independent directors. These reforms appear to reflect a widely held belief among regulatory bodies and the corporate world that board independence and equity-based director incentives unambiguously improve board performance and, therefore, enhance shareholder value.

In this paper, however, we show that this belief may sometimes be misplaced. We analyze the efficacy of such reforms in a model where both adverse selection and moral hazard are present at the level of the firm’s management. Delegating governance to the board improves monitoring but creates another agency problem because directors themselves avoid effort and are dependent on the CEO.

We show that as the board’s dependence on the CEO increases, its monitoring efficiency may increase even as incentive efficiency deteriorates with respect to compensation contracts awarded to the managers. The reason is that a more dependent director benefits less from superior information about the firm’s economic prospects generated by monitoring. This endogenous tension implies – contrary to the assumptions underlying recent reforms – that outside shareholders’ value can indeed decrease as board independence increases. Moreover, and again contrary to the general presumption in the literature, higher equity incentives for the board sometimes may increase (equity-based) compensation awards to management.

The full paper is available for download here.

The Love Song of The Delaware Court of Chancery

More from:
Editor’s Note: This post was written by David Kessler, HLS ‘09, in the course of his taking Corporations with Professor Robert C. Clark.

(With the rhyme scheme and meter mostly intact and with many apologies to T.S. Eliot)

Let us rule then, you and I,
When there’s theft of corp’rate opportunity
Like a patient over-billed by doctors able;
Let us read through certain less well-researched briefs,
The nimbly wrought conceits
Of high-paid lawyers in nearby hotels
Who work so hard all day for corporate shells;
Days that follow, full of insipid argument
Of questionable intent
That lead some to such aggravating questions . . .
Oh, do not ask, “Why is it?”
Let us rule, and don’t inquisit!

In the court attorneys come and go
Talking of prices high and low.

. . .

And indeed there will be time
To wonder, “Why due care?” and, “Why due care?”
Time to cite Disney in Delaware,
With a weak spot for process seeming fair—
[They will say: “How his rules help business win!”]
My rules are right, laws see disloyalty as greater sin,
Not corp’rate course I most protest, with business judgments I begin—
[They will say: “But how can Michael Eisner win?”]
Why due care?
Surely bad faith is worst?
In opinions there is room
For decisions and omissions which the higher courts reverse.

. . .

Oh the securities exchanges and the SEC!
Fearful of false traders,
Awake . . . watchful . . . such castigators,
They ask for more, wise use of Rule 10b.
Should I, finding fraudulent devices,
Have the strength to force the moment to its crisis?
And though I don’t see full disclosure ‘fore the trade,
Though I have seen losses [heaped highly] pile up as on a platter,
I cannot stop it—I see no bad actor;
But I too have seen omissions with scienter,
I have seen manipulations by a corporation slicker.
Long or short, a trade was made.

And would it have been worth it, after all,
Before the suits, demands refused by SLCs,
Directors independent, Section one-forty-one (c)s,
Would it have made sense to file,
To have argued that demand was just futile,
To have tried so hard to heed Zapata’s call
To argue interests false or domination
To say: “I am plaintiff pure, for class unsaid,
Come here to sue for all, I shall sue for all”—
If one, junking a lawsuit never read,
Should say: “There is no one to sue at all.
There is no one, at all.”

. . .

I grow bold . . .I grow bold . . .
I shall write some rulings that help law unfold.

Shall I part with precedent? Do I dare to find a breach?
I shall don my robe in chambers, and hear attorneys screech.
I have heard Justices talking, each to each.

I do not think they will overrule me.

I have read their tortured case law now for days
On Revlon and on Unocal attack
Of mergers sound and mega-deals off track.

We have day-dreamed in the Court of Chancery
Of lawyers’ claims, both righteous and unsound
Till our clerks’ voices wake us, and we frown.

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