Monthly Archives: July 2010

Why Stewardship is Proving Elusive for Institutional Investors

Simon Wong is Managing Director at Governance for Owners and Adjunct Professor of Law at Northwestern University School of Law. This post is based on an article that recently appeared in the Butterworths Journal of International Banking and Financial Law, which is available here.

As the dominant owners of listed companies in many developed markets, institutional investors have been under increasing pressure to act as responsible shareholders. In the UK, where institutions own more than 70% of the stock market, a Stewardship Code has been developed to encourage pension funds, insurance companies, and their asset managers to monitor and engage investee companies actively with the view to protect and enhance shareholder value (see Figure 1). Similar efforts are underway in Canada, France, the Netherlands, and other markets.


What to Expect from Dodd-Frank in the 2011 Proxy Season

Editor’s Note: Holly Gregory is a Corporate Partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on an extract from a Weil Gotshal Briefing; the complete article is available here. Other posts relating to the Dodd-Frank Act are available here.

The new requirements of the Dodd-Frank Act and current trends in shareholder activism are likely to combine to make the 2011 proxy season unlike any before in terms of the range of matters on which boards will need to elicit shareholder support and the level of shareholder engagement:

  • Proxy Access: We expect the SEC to act promptly to give substantial shareholders or shareholder groups the ability to include their nominees for a limited number of board seats in the company’s proxy materials. Interest in access is evidenced by the efforts of some institutional shareholders to create databases of potential director candidates. For calendar year companies, we expect the deadline to submit shareholder nominations for inclusion in company proxy materials to be around year-end, subject to the terms of advance notice bylaws (which may need to be reset when the new rules are adopted).

Boards of Banks

This post comes to us from Daniel Ferreira, Tom Kirchmaier, and Daniel Metzger all of the London School of Economics.

In our paper, Boards of Banks, which was recently made publicly available on SSRN, we assemble the most complete data set on boards of banks to date. Our data allow us to draw a detailed picture of bank board composition up to and including the crisis period. The data reveal a number of new empirical facts. Right before the beginning of the crisis in 2007, the average board independence in the world’s largest banks was roughly 67%, meaning that two out of three bank directors were formally independent. These high levels of independence are both a recent and mostly North-American phenomenon. In 2000, the average level of board independence in our sample was just 40%. Canada and the US have the highest levels of bank board independence in the world, at about 75%.

Our data also reveal many interesting patterns. Client-directors are usually reported as being independent, although they have clear business relations with the banks that they are supposed to monitor. While the governance literature has focused on the role of bankers on boards of nonfinancial firms, the other side of the coin – nonfinancial corporate clients on boards of banks – has yet to be analyzed.


Upsizing and Downsizing Your IPO

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 Client Alert by Brian G. Cartwright, Alexander F. Cohen, Kirk A. Davenport and Joel H. Trotter.

The reds have been printed; the deal is on the road; and the champagne is on ice. Now, all that is left is for the IPO investors to step up and buy the stock. It’s a tempting moment to relax — but an experienced deal lawyer knows better. This is the time to start preparing for the possibility that the deal will be wildly oversubscribed or will struggle mightily. In either case, the question that will shortly come your way is “How much can the deal be upsized or downsized at pricing?”


Erosion of the Fiduciary Duty Requirement in Insider Trading Actions

Joel Cohen is a partner in the New York office of Gibson, Dunn & Crutcher LLP. This post is based on an article by Mr. Cohen, Mary Kay Dunning and Gregory H. Shill that first appeared in the Securities Litigation Journal.

Every decade or so, a new wave of interest in prosecuting insider trading emerges. We see this now. Just as the tides of interest in insider trading ebb and flow, so too do the contours of the offense itself. Given the present environment, of course, one would expect regulators to step up insider-trading enforcement, and they have. [1] This growing regulatory aggressiveness has coincided with judicial relaxation of the elements of insider-trading violations. Ensuring proper enforcement without inhibiting the free flow of information that regulators and the courts have historically recognized as vital to healthy markets truly has become a high-wire act.


How to Pay a Banker

Editor’s Note: This post is Lucian Bebchuk’s most recent op-ed in his column series titled “The Rules of the Game,” written for the international association of newspapers Project Syndicate, which can be found here. This op-ed builds on his article Regulating Bankers’ Pay, co-authored with Holger Spamann, which is available here.

The United States’ Federal Reserve Board recently adopted a policy under which bank supervisors, the guardians of the financial system’s safety and soundness, would review the compensation structures of bank executives. Authorities elsewhere are considering or adopting similar programs. But what structures should regulators seek to encourage?

It is now widely accepted that it is important to reward bankers for long-term results. Rewarding bankers for short-term results, even when those results are subsequently reversed, produces incentives to take excessive risks.

But tying executive payoffs to long-term results does not provide a complete answer to the challenge facing firms and regulators. The question still remains: long-term results for whom?


A New World for Whistleblowers

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, Theodore A. Levine and John F. Savarese. An earlier post by Mr. Carlin discussing securities enforcement under the Dodd-Frank Act was posted here; other posts on the Dodd-Frank Act are available here.

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, creates an elaborate new regime of financial incentives to encourage whistleblowers to come forward to the SEC with information about securities law violations. An unfortunate likely effect of this new regime, however, may be to undermine the effectiveness of corporate compliance programs.

The principal new incentive offered to whistleblowers is the opportunity to obtain a substantial cash bounty in the event that information they provide leads to an enforcement action in which the SEC obtains a monetary sanction (defined to include penalties, disgorgement and interest) totaling at least $1 million. In such cases, Section 922 provides that the SEC “shall pay an award” to the whistleblower of between 10 and 30 percent of the monetary sanctions imposed in the SEC enforcement action and in any related actions brought by the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization or a state attorney general in a criminal proceeding.


Review Links Corporate and Securities Law and Human Rights

Editor’s Note: John Ruggie is the Berthold Beitz Professor of International Affairs at the Kennedy School of Government, and an Affiliated Professor in International Legal Studies at Harvard Law School. He is currently serving as the United Nations Secretary-General’s Special Representative for Business and Human Rights. This post relates to a recent trends paper prepared by Professor Ruggie, which is available here.

I am pleased to share with you the results of a research project that examined whether and how corporate and securities law in more than 40 jurisdictions around the world currently fosters corporate respect for human rights. This project was prepared as part of my mandate as the Special Representative of the UN Secretary-General on Business and Human Rights.

To my knowledge, this is the first in-depth, comparative study of the links between human rights and corporate and securities law. More than 20 leading corporate law firms from around the world participated in the research on a pro bono basis, with Weil, Gotshal and Manges contributing from the US side.


Determinants of CEO Pay

This post comes to us from Brian Cadman of the School of Accounting at the University of Utah, Sandy Klasa of the Department of Finance at the University of Arizona, and Steve Matsunaga of the Department of Accounting at the University of Oregon.

In the paper, Determinants of CEO Pay: A Comparison of ExecuComp and Non-ExecuComp Firms, we document systematic differences in contracting environment characteristics between ExecuComp and non-ExecuComp firms that are likely to impact firms’ executive compensation contracts. The ExecuComp database provides an easy-to-use data source of a relatively broad range of firms, including the largest and arguably most important firms in the economy. As a result, the database is extensively used to investigate a wide range of governance and compensation issues, though little is known regarding the governance structures and compensation functions of firms not included in the database, or how they differ from those of firms included in ExecuComp.


Forum Non Conveniens Defeats Shareholder Litigation on Cross-Border Mergers

This post comes to us from Todd Cosenza of Willkie Farr & Gallagher LLP, and is based on a Willkie Farr & Gallagher client memorandum by Mr. Cosenza and Tariq Mundiya.

Two recent U.S. federal district court decisions (In re Cadbury Shareholder Litig. and In re Alcon Shareholder Litig.) highlight how the common law doctrine of forum non conveniens can thwart class actions commenced by U.S. shareholders challenging cross-border merger transactions. Both decisions also reflect the trend of U.S. courts to refrain from adjudicating claims brought by U.S. shareholders impacting foreign sovereign interests and arising predominately under foreign laws. As the Alcon court noted, U.S. courts are increasingly attempting to “avert the unnecessary globalization of this Court’s jurisdiction that would occur if the mere trading of stock on the NYSE would expose foreign businesses to corporate governance challenges in this Court.” [1]


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