Monthly Archives: May 2010

Survey Highlights the Importance of Lead Directors

Jeffrey Stein is a partner in the Corporate Practice Group at King & Spalding LLP. This post is by Mr. Stein and Michael J. Egan, a partner in the Corporate Practice Group at King & Spalding. Mr. Egan served on the Advisory Board of the PricewaterhouseCoopers Lead Director Survey, discussed in this posting. Read the Survey here.

In 2002, the New York Stock Exchange first mandated that listed companies have a “presiding director” to undertake the functions of presiding at meetings of the independent directors and receiving communications from shareholders. In the ensuing eight years, the prevalence of presiding directors, lead directors and non-executive board chairmen (all of which we refer to as “lead directors”) has increased significantly, so that almost all large U.S. public companies now have such an independent board leader. The powers exercised by lead directors have become more important, with many lead directors moving beyond the limited tasks required by the NYSE to exercise central roles in improving the performance of their boards and their companies.

With the increased importance of lead directors for U.S. public companies, it is timely that PricewaterhouseCoopers has undertaken a comprehensive survey of lead directors (the “Survey”). The report of the Survey, “Lead Directors: A study of their growing influence and importance” was published on April 22, 2010, and a series of briefings discussing the results of the survey has now been held in three cities. The Survey is available here.

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New SSRN e-journal on Bankruptcy, Financial Distress, and Reorganization

Editor’s Note: This post is part of a series introducing journals published by SSRN’s new Corporate Governance Network (CGN). CGN publishes and distributes electronic journals covering the full range of areas in corporate governance. It seeks to provide its readers with full exposure to new corporate governance research placed on SSRN irrespective of the author’s discipline. CGN’s director is Lucian Bebchuk, Director of the Program on Corporate Governance at Harvard Law School.

This post seeks to draw the attention of readers of the Forum to the new e-journal on Bankruptcy, Financial Distress, & Reorganization of SSRN’s Corporate Governance Network (CGN) of SSRN. This journal distributes abstracts of, and links to, selected recent working papers that deal with dissolutions and bankruptcy reorganizations, financial distress and workouts outside insolvency, and similar topics.

The journal collects abstracts on these topics from all new submissions to the entire SSRN database irrespective of discipline. It brings together contributions from accounting, economics, finance, law, management, sociology and psychology. Thus, this e-journal provides its readers with full exposure to all new papers related to its subject matter placed on SSRN.

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Towards a New Paradigm for Executive Compensation

Jay Lorsch is the Louis E. Kirstein Professor of Human Relations at Harvard Business School. Rakesh Khurana is the Marvin Bower Professor of Leadership Development at Harvard Business School. This post is based on an article by Professor Lorsch and Professor Khurana that first appeared in Harvard Magazine.

Concerns about the compensation of chief executive officers and other top executives of American public companies have reached fever pitch since the financial crisis and the economic meltdown of 2009. Some observers blame the recent recession in part on the flawed compensation arrangements for the top management of major financial institutions. Nor are such concerns new. For almost 20 years, a growing chorus of voices—including some shareholders, the business media, policymakers, and academics—have been criticizing the way top managers are paid. The criticisms focus particularly on CEOs not only because they are the highest paid, but also because their compensation sets the pattern for executives beneath them.

Like previous criticisms, the current complaints focus on two issues: executives are paid too much, and current incentive-pay schemes are flawed because the connection between executive pay and company performance is mixed at best—and at worst has led to a series of dysfunctional behaviors.

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A Corporate Beauty Contest

This post comes to us from John Graham, Professor of Finance at Duke University, Campbell Harvey, Professor of International Business at Duke University, and Manju Puri, Professor of Finance at Duke University.

In the paper, A Corporate Beauty Contest, which was recently made publicly available on SSRN, we investigate whether there is any relation between facial traits and rising to the job title of CEO. Our results, based upon a series of experiments involving close to 2,000 subjects, suggest there is a significant relation.

Our first experiment tests to see whether subjects evaluate the facial traits of CEOs to be different when showed a photograph of the CEO and a carefully matched non-CEO. We ask the subjects to select the one that looks the most “competent”, “trustworthy”, “likable”, and “attractive”. In this experiment, we find that CEOs are perceived to be more competent and slightly more attractive. The CEOs are considered less likable and less trustworthy.

Our second experiment tests whether subjects ascribe different facial characteristics to CEOs who run large versus small firms. This separation is important because we know that large firm CEOs earn much higher compensation. The strongest results are consistent with the first experiment. The large-firm CEOs are perceived to be more competent and less likable.

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Designating Delaware as the Exclusive Jurisdiction for Intra-Corporate Disputes

Charles Nathan is Of Counsel at Latham & Watkins LLP and is co-chair of the firm’s Corporate Governance Task Force. This post is based on a Latham & Watkins Corporate Governance Commentary by Mr. Nathan, Laurie Smilan, Michele Kyrouz, Timothy FitzSimons and Derrick Farrell, and relates in part to the recent decision in In re Revlon, Inc. Shareholders Litig., which is available here. 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.

As with real estate acquisitions, where intra-corporate disputes are concerned, the key to optimal results is “location, location and location.” [1] The Delaware Chancery Court is widely regarded as the country’s preeminent business court, with experienced jurists who have deep understanding of Delaware corporate law and long standing precedent regarding corporations’ governance. Indeed, the enabling, practical approach of Delaware law, the extensive body of judicial precedent and the expertise and business savvy of the Delaware Court of Chancery are the reasons that most companies choose to incorporate in Delaware in the first place.

Unfortunately, plaintiffs’ lawyers often file cases against Delaware companies under Delaware law in jurisdictions other than Delaware. Often, this is because plaintiffs’ lawyers, particularly those with weak cases, hope that other, less experienced judges will misapply Delaware law, that the greater uncertainty of the outcome will increase the settlement value of the litigation [2] or that courts outside of Delaware are less likely to limit or reduce plaintiffs’ attorneys’ fee awards. [3]

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Competition for Managers, Corporate Governance, and Incentive Compensation


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Viral Acharya is a Professor of Finance at New York University.

In the paper, Competition for Managers, Corporate Governance, and Incentive Compensation, which was recently made publicly available on SSRN, my co-authors (Marc Gabarro and Paolo Volpin, both at London Business School) and I theoretically explore the joint role played by corporate governance and competition among firms to attract better managers. In our principal agent problem, there are two ways to induce the manager to make the right decision: paying compensation in case of better performance and investing in corporate governance to punish managers if things go badly. We show that when managerial ability is observable and managerial skills are scarce, competition among firms to hire better managers implies that in equilibrium firms will choose lower levels of corporate governance. Intuitively, the result follows from the fact that managerial rents cannot be influenced by an individual firm but instead are determined by the value of managers when employed somewhere else. Hence, if a firm chooses a high level of corporate governance, the remuneration package will have to increase accordingly to meet the participation constraint of the manager. It is therefore firms (and not managers) that end up bearing the costs of higher corporate governance with little benefit.

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Sharp Increases in Recent FCPA Enforcement

This post comes to us from Martin Weinstein, partner in the Litigation Department of Willkie Farr & Gallagher LLP and leader of the Compliance & Enforcement Practice Group, and is based on a Willkie client memorandum by Mr. Weinstein, Robert J. Meyer, and Jeffrey D. Clark.

Although enforcement of the Foreign Corrupt Practices Act (“FCPA”) has been trending upward for several years, the first quarter of 2010 saw unprecedented developments in the enforcement of the statute. In the first three months of 2010 alone, the U.S. government brought or resolved FCPA charges against thirty-six companies and individuals — thirty more than in the first quarter of 2009 and thirty-two more than in the first quarter of 2008. The U.S. Department of Justice (the “DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) settled five cases against corporations, including two settlements of long-term investigations of major non-U.S. corporations, BAE Systems plc and Daimler AG, involving hundreds of millions of dollars in fines and penalties. The DOJ also unveiled a multi-year FCPA undercover investigation with the simultaneous indictment and arrest of twenty-two individuals who allegedly agreed to pay bribes overseas while dealing with an undercover FBI agent and a cooperating witness.

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Creating a Dynamic Investment Management Regulatory Scheme

Editor’s Note: This post comes to us from Andrew J. Donohue, Director of the Division of Investment Management at the Securities and Exchange Commission, and is based on a recent address by Mr. Donohue to the Practising Law Institute’s Investment Management Institute, the full text of which is available here. The views expressed in the post are those of Mr. Donohue and do not necessarily reflect those of the SEC, the Commissioners or the Staff.

This year, not only is Congress considering comprehensive legislation that could impact even the most fundamental aspects of how our financial markets are governed, but we also saw last week the Supreme Court deliver a landmark decision concerning the regulation of investment companies. You just don’t see that every day (I guess thankfully, although in this case, it was gratifying to see the Court affirm a long-held approach regarding fund Boards’ review of advisory fees).

Much of the activity we are seeing now regarding financial regulation of course stems from the turmoil in our financial markets over the past few years. One result of working in the aftermath of these events is that we are trying to craft a regulatory regime with a view towards preventing or otherwise mitigating further problems – problems that we may not even be aware of today. Rather than reacting to a singular event, our regulatory goal in the Division of Investment Management, in many areas, is to try and create a more dynamic regulatory scheme – one that will be effective in increasing investor protection even as the investment company landscape continues to change and evolve at a rapid pace. In addition to adopting a forward-looking approach in the Division’s initiatives, we are also faced with new aspects of regulation. For example, as our markets have become more complex and intertwined, we must consider the effect of certain risks, although not new but certainly more pervasive – such as systemic risks – as an important element when seeking to achieve our mission of investor protection, maintaining fair, orderly and efficient markets and facilitating capital formation.

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Corporate Governance Redux in the Light of Citizens United


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Editor’s Note: Robert Monks is the founder of Lens Governance Advisors, a law firm that advises on corporate governance in the settlement of shareholder litigation. This post was the basis for a lecture that Mr. Monks recently delivered at Harvard Law School.

“Presumably in a free market economy the players require some restraints in their pursuit of society’s resources and creation of externalities, and these restraints are to be imposed by government acting in response to the preferences of individual human beings who have a much broader range of preferences than simply wealth maximization. To allow the wealth maximizing business corporation a powerful voice in determining how social resources are to be allocated by government is to give that corporation significant power in determining how the rules of the only game it is playing should be changed, rather than confining it to play under the rules preferred by human individuals.” [1]

The Corporation

A corporation is a creature of the state; it is not a natural creature created by the Almighty and entitled to the rights of flesh and blood human beings. The language of judicial supporters of corporate personhood mingles various kinds of association. In his lengthy Austin dissent, Justice Scalia referred to “that type of voluntary association known as a corporation”, “that form of association known as a for-profit corporation,” and “those private associations known as corporations.” In his Citizens United concurring opinion, Scalia refers to “associational speech”, “the right to speak in association with other individual persons”, “the speech of many individual Americans who have association in a common cause, giving the leadership of the party [Republican or Democrat] to right to speak on their behalf. The association of individuals in a business corporation is no different – or at least it cannot be denied the right to speak on the simplistic ground that it is not “an individual American.”

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Big Bad Banks?


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Editor’s Note: Ross Levine is a Professor of Economics at Brown University.

In the paper, Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States, forthcoming in the Journal of Finance, my co-authors (Thorsten Beck and Alexey Levkov) and I assess the impact of bank deregulation on the distribution of income in the United States. Policymakers and economists disagree sharply about who wins and who loses from bank regulations. While some argue that the unregulated expansion of large banks will increase banking fees and reduce the economic opportunities of the poor, others hold that regulations restrict competition, protect monopolistic banks, and disproportionately help the rich. More generally, an influential political economy literature stresses that income distributional considerations, rather than efficiency considerations, frequently exert the dominant influence on bank regulations as discussed in Claessens and Perotti (2007) and Haber and Perotti (2008).

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