Yearly Archives: 2008

Forget Issuer Proxy Access and Focus on E-Proxy

Posted by Jeffrey N. Gordon, Columbia Law School, on
Monday, February 4, 2008
, ,
More from:

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

Posted by René Stulz, Ohio State University Fisher College of Business, on
Friday, February 1, 2008
, , ,
More from: , ,

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.

Bebchuk Ranks First Among Law Professors on SSRN

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, January 31, 2008

More from:

As indicated in a recent Harvard Law School announcement, statistics released by the Social Science Research Network (SSRN) indicate that, as of the end of 2007, the works of Harvard Law School’s corporate governance scholar Lucian Bebchuk have been downloaded more than the work of any other law professor. His papers have attracted a total of more than 80,000 downloads.

SSRN is the leading electronic service for social science research, and its electronic library contains over 171,000 full-text documents by more than 85,000 authors.

The five works by Bebchuk that have attracted the largest number of total downloads were: What Matters in Corporate Governance? (8093 downloads), The Case for Increasing Shareholder Power (3827 downloads), A Theory of Path Dependence in Corporate Ownership and Governance (3517 downloads), Executive Compensation as an Agency Problem (3336 downloads), and Managerial Power and Rent Extraction in the Design of Executive Compensation (2980 downloads).

The group of the top 100 law professors, based on the total number of downloads of their work, includes three additional HLS faculty working in the corporate area: Reinier Kraakman (13), Mark Roe (32), and Allen Ferrell (41). The Top 100 group also includes senior research fellow Alma Cohen (40) and visiting professor Jesse Fried (23).

Now Publicly Available: SEC’s Executive Compensation Comments and Responses

Posted by Broc Romanek, TheCorporateCounsel.net, on
Tuesday, January 29, 2008
,
More from:

This post is from Broc Romanek of TheCorporateCounsel.net.

For the subset of the 350 companies that were both reviewed by the SEC’s Division of Corporate Finance as part of the executive compensation review project and have received one of these “all clear” letters from the Staff, you will soon find the SEC comment letter and the company response posted on the SEC’s EDGAR system. It looks like the Staff hung pretty close to the timeline of “45 days since the Staff started informing companies that they were clear,” which is earliest that the Staff can post letters/responses pursuant to its own policy (which was confirmed in the Staff Observations in the Review of Executive Compensation Disclosure). I just took a cursory swing through the SEC’s database over the weekend and found these:

– Allstate – comment letter and response

– Bristol Myers – comment letter and response

– Berkshire Hathaway – comment letter and response

– Travelers Companies – comment letter and response

There’s about 50 more out there and we’ve posted a more comprehensive list on CompensationStandards.com in a new “SEC Comments” Practice Area. Hopefully, somebody can prove me wrong – but it’s quite challenging to run searches on the SEC’s comment letter database – as well as the third-party providers’ databases – to find these letters. The good ole boolean-type searches don’t seem to work for these particular batch of letters…

Tellabs redux

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulatio, on
Monday, January 28, 2008
, , ,
More from: , ,

The post below comes to us from Byron Georgiou and Joseph D. Daley at Coughlin Stoia Geller Rudman & Robbins LLP.

On Thursday, January 17, a Seventh Circuit Court of Appeals panel led by Judge Richard A. Posner handed down the Circuit’s second crack at the “strong inference” standard in the Tellabs matter. Makor Issues & Rights, Ltd. v. Tellabs, Inc., __ F.3d __, No. 04-1687, 2008 U.S. App. LEXIS 975 (7th Cir. Jan. 17, 2008). This latest Tellabs opinion (“Tellabs II”) arose out of a “comeback” case for the Seventh Circuit, following the United States Supreme Court’s June 2007 rejection of the Circuit’s initial attempt to divine the Securities Exchange Act of 1934’s “strong inference” of scienter requirement, as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S. Ct. 2499 (2007) (vacating and remanding Makor Issues & Rights, Ltd. v. Tellabs, Inc. (“Tellabs I”), 437 F.3d 588 (7th Cir. 2006)).

By way of background, the Tellabs saga involved a manufacturer of specialized fiber-optic equipment which, along with several of its top officers, was accused of securities fraud by investors. After repeatedly providing optimistic reassurances in late 2000/early 2001 about the company’s financials, projected revenues/earnings, and demand for its main products, the bombshell, contradictory truth burst in mid-2001: the fiber-optics bubble had already burst in the prior year, purported demand for Tellabs’s core products was actually a sham, and the company’s revenues and profits were plummeting. Not surprisingly, Tellabs stock fell from its class-period peak of $67 to just under $16, and outraged investors filed suit.

Following the district court’s dismissal of the investors’ securities-fraud complaint, the Seventh Circuit reversed in part and held that the investors had met the “strong inference” of scienter standard by alleging facts “from which, if true, a reasonable person could infer that the defendant acted with the requisite intent.” (While stating that holding, the Seventh Circuit explicitly rejected a more-stringent standard that had been adopted by the Sixth Circuit – i.e., that plaintiffs’ inferences had to be more plausible than any competing inferences. Cf. Fidel v. Farley, 392 F.3d 220, 227 (6th Cir. 2004) (PSLRA’s heightened pleading requirements mean that “‘plaintiffs are entitled only to the most plausible of competing inferences’”)).

Granting certiorari, the Supreme Court rejected both views: While the scienter inferences in plaintiffs’ favor need not be irrefutable, or even the most plausible of competing inferences, nor will they suffice if merely “‘reasonable’ or ‘permissible.’” Plaintiffs satisfied the PSLRA’s strong-inference requirement “only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.”

On remand to the Seventh Circuit, the Tellabs II panel applied the Supreme Court’s newly enunciated standard. Judge Posner’s opinion is wide-ranging, to be sure, but within its wide expanse there are several gems that are sure to provoke a flurry of supplemental briefing in securities-fraud cases around the country. (Oddly, on the case’s remand the Tellabs II panel was composed of just two of three Circuit judges from Tellabs I; Judge Posner replaced Judge Ripple.) In no particular order, here are several – albeit not all – of the conclusions that Tellabs II reaches concerning strong-inference factors:

READ MORE »

How Not to Govern

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulatio, on
Friday, January 25, 2008

More from:

This post comes to us from Lesley Rosenthal of Lincoln Center.

The recent governance crisis at the Smithsonian Institution came about through a toxic combination of unchecked arrogance by the CEO, a relatively disengaged Board, and a dysfunctional system of checks and balances. The Smithsonian appointed an independent review committee to take an unflinching look at corporate governance practices there. “How Not to Govern,” which was published in the New York State Bar Journal (Nov/Dec 2007) by Lincoln Center’s General Counsel Lesley Friedman Rosenthal (HLS ’89), discusses the independent committee’s findings and explores the lessons that may be learned by others in the sector, including chief executives, General Counsel, Corporate Secretaries, board members, outside attorneys, and scholars.

A Self Regulation Proposal for the Hedge Fund Industry

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, January 24, 2008
, , ,
More from:

This post comes to us from J.W. Verret. The text of this post summarizes the author’s analysis from an article titled Dr. Jones and the Raiders of Lost Capital: Hedge Fund Regulation Part II, A Self-Regulation Proposal, which will be published in volume 3 (2007) of the Delaware Journal of Corporate Law.

In 2003, The Securities Exchange Commission instituted a regulation requiring certain hedge funds, previously unregulated, to register as Investment Advisers. That regulation would have meant that funds would have become subject to an intense compliance inspection program. The SEC’s stated goals in instituting this proposal were to minimize instances of fraud perpetrated by hedge funds. Critics of hedge fund registration, such as former Fed Chairman Greenspan, urged that over-regulating hedge funds could mean stifling the liquidity that these funds bring to the securities markets. Other critics argued that hedge funds may have simply moved offshore to avoid the regulation. In the summer of 2006, the District of Columbia Court of Appeals invalidated the 2004 registration provision in Goldstein v. SEC. Since that time, the House Committee on Financial Services, chaired by Rep. Barney Frank, has held hearings into hedge fund regulation. The Administration has announced its intention not to support a further regulatory effort. Though the branches of government are currently at odds, this issue is not likely to go away, especially if Congress and the Executive branch are controlled by the Democratic Party after the ’08 elections.

In the last ten years, nearly 2 trillion investment dollars have flowed into an industry that found itself at the center of a mutual fund fraud investigation in 2004 and now has a starring role in the subprime lending crisis. Anticipating future regulatory efforts, this article intends to design a regulatory scheme that is more effective and less costly than the SEC’s invalidated registration requirement to provide regulators with an alternative to satiate the desire to “do something” in response to eventual interest group pressure. Self-Regulation is a prominent theme in our capital markets. The NASD and NYSE, now merged to form the FINRA, have long regulated member firms and broker dealers. The Federal Reserve is effectively a quasi Self-Regulatory Organization (“SRO”), with member banks nominating the Regional Presidents. One wonders why the idea of self-regulation in the hedge fund industry has not been previously explored as a viable compromise between the existing extreme views on this topic. Bureaucratic regulators are notoriously slow to innovate their approach, especially when compared to the pace of change in the financial markets, but self-regulators are closer to the front lines. In addition, self-regulatory entities are more sensitive to compliance costs. Even in choosing between equally effective regimes, bureaucratic regulators may, however, have incentives other than cost in mind due to heuristic bias that overemphasizes the risk of scandal or the budgetary allocations that come with enhanced regulatory power.

Economic competition theory also supports self-regulation, as a properly structured SRO creates internal competition among market players which results in decision outcomes that are preferential to direct government oversight. A prisoner’s dilemma can result from the regulation game facing the SRO rulemaking body, in which funds would seek to take capital investments from competitors by voting within the SRO for regulations that enhance transparency of a fund’s fiduciary compliance, out of an interest in taking capital flows from competitors who may not. The result is an equilibrium of compliance that could exceed the level of transparency that would exist without the collective action, thus giving more sharpness and binding effect to any best practices that may exist in the industry and providing a more cost effective enforcement avenue for those best practices. The beauty of this approach is that, unlike the SEC, the SRO internalizes the cost of the regulation. The payoffs to decisions on voting for disclosure regulation are based on revealing things of value to hedge fund investors, so the SRO only increases regulatory cost up to the point at which the new regulation is of such a large marginal value to hedge fund investors that they are likely to decide to switch funds if their fund is revealed as being non-compliant.

READ MORE »

Rethinking Board and Shareholder Engagement in 2008

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulatio, on
Wednesday, January 23, 2008
,
More from: , ,

This post comes to us from Holly J. Gregory and Ira M. Millstein of Weil, Gotshal & Manges LLP.

We have just released our annual memo identifying areas for focus by corporate governance participants in the coming year: “Rethinking Board and Shareholder Engagement in 2008” (co-authored with our colleague Rebecca C. Grapsas). In the memo, we predict — and encourage — increased efforts by boards of directors to engage shareholders in less contentious, more cooperative interaction and communication. While we salute shareholder activism’s stimulus for rebalancing corporate power in the past twenty years, we caution that the forces for change should abate once an appropriate balance is achieved, or a new imbalance will result. Boards are well-advised to be open to shareholder communications on topics that bear on board quality and attention to shareholder value, communications that are likely to improve mutual understanding and avoid needless confrontation.

At the same time, shareholders have the responsibility to act as concerned and rational owners who make decisions based on knowledge of the nuances; who avoid rigid, box-ticking methods of judging good governance; who don’t abdicate to proxy advisors their responsibility to use judgment; and who avoid activism for activism’s sake. In this spirit, we lay out good practices of board-shareholder engagement in the areas of (1) board composition and independent leadership, (2) corporate performance disclosures, (3) executive performance, compensation and succession, (4) strategic direction, and (5) societal concerns, including climate change and other issues. Finally, we suggest that it may be time for a dialogue on the limits of shareholder power. The full text of the memo is available here.

A Different View of Stoneridge; and Chairman Cox on Sovereign Wealth Funds

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Tuesday, January 22, 2008
, ,
More from: ,

This post is from John F. Olson of Gibson, Dunn & Crutcher LLP.

a) The Supreme Court’s Stoneridge decision has received a lot of attention. On this blog, it was summarized here and commented on here. For those who know this Court and who heard the oral argument, the decision is unsurprising. Justice Kennedy’s opinion, however, is broader than necessary to reach the result. He is telling the lower courts, ‘Don’t mess with my Central Bank decision. Most of us up here don’t like implied private rights of action and we’re not going to let the lower courts find ways to expand them.’

Kennedy’s opinion does give plaintiffs some hope. Following the Solicitor General’s brief, the Court does say that non-verbal conduct can be fraud and thus “a wink and a nod” can still get secondary actors in trouble. What is clear is that this Court, like many thoughtful academics, has become highly skeptical of the honesty, cost effectiveness and real value to investors of our class action litigation system. The greed and sleazy ethics of some of the “private attorneys general” of the plaintiffs bar have put the whole class action system in disrepute. A majority of living former SEC Chairmen and a number of other former Commissioners and former academics had filed an amicus curiae brief in the case supporting the decision reached by the Supreme Court on Tuesday. The brief was prepared by colleagues of mine, whose summary of the case can be found here.

b) I’m also posting another too little noticed speech by Cox, delivered a month ago in Washington, in which he discusses the growing concerns with the role of sovereign wealth funds and government-affiliated public companies in global securities markets and the impact of such government-related concentrations of capital, and related market influence, on corporate ethics and policy, transparency and the integrity of financial reporting. What about the values of corporate governance, and shareholder power, when the controlling interest or “golden share” is held by a government, particularly a government that itself does not practice transparency or tolerate democracy as we know it?

The Annual Meeting of ALEA

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, January 18, 2008

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

This post is a call for papers for the annual meeting of the American Law and Economics Association. The meeting, which is expected to include at least 8 sessions on subjects in the corporate field, will take place this spring at Columbia Law School on May 16-17, 2008. The meeting will bring together researchers from law schools, economics departments, business schools, and elsewhere to present and discuss current projects on a wide range of topics in the field of law and economics. The conference is expected to have two or more sessions in each of the following areas of the corporate field: Corporate Law and Corporate Governance: Policy and Theory; Corporate Law and Corporate Governance: Empirical; Corporate and Securities Law: Comparative and International; and Securities Regulation, Financial Institutions, and Capital Markets Regulation.

Authors are invited to submit their papers electronically at the Association’s website. This website also includes further information about the submission process and the meeting, as well as about prior meetings of the Association. The deadline for submission of papers is Monday, January 28, 2008. For readers interested in attending the meeting, we will post the program in several weeks.

Page 28 of 29
1 … 18 19 20 21 22 23 24 25 26 27 28 29