Yearly Archives: 2010

Audited Financial Reporting and Voluntary Disclosure as Complements

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 3, 2010
, ,
More from: , ,

The following post comes to us from Ray Ball, Professor of Accounting at the University of Chicago, Sudarshan Jayaraman of the Accounting Department at Washington University, and Lakshmanan Shivakumar, Professor of Accounting at London Business School.

In the paper, Audited Financial Reporting and Voluntary Disclosure as Complements: A Test of the Confirmation Hypothesis, which was recently made publicly available on SSRN, we examine the hypothesis that audited financial reporting and voluntary disclosure of managers’ private information are complementary mechanisms for communicating with investors, not substitutes. More specifically, we test the hypothesis in Ball (2001) that independent verification and reporting of financial outcomes encourages managers to be more truthful and hence more precise in their disclosures. This allows managers to credibly disclose private information that is not directly verifiable, alleviating the problem (Crawford and Sobel, 1982) that private information disclosure as a stand-alone mechanism is uninformative because in equilibrium it is untruthful.

READ MORE »

The SEC Departs from an Important Safeguard

Posted by Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Thursday, September 2, 2010
, ,
More from: , ,

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 and Theodore A. Levine.

Recently, the SEC made permanent the delegation of its statutory formal order investigation authority to the Director of the Division of Enforcement. This delegation, which the Enforcement Director has sub-delegated to senior enforcement staff, essentially transfers the SEC’s broad authority to invoke its subpoena power to numerous of its enforcement staff without any apparent oversight.

There is a serious question whether the delegation is authorized under the relevant statutes. Congress gave the power to the Commission (not the staff) to define the scope of a formal investigation and to establish limits within which the staff could resort to compulsory process. In short, the requirement of a formal order is a structural mechanism to keep the staff’s subsequent investigation and use of subpoena power within certain confines. Subpoenas are enforceable only to the extent they seek information which is reasonably relevant to matters within the scope of the formal order, but the staff now defines the scope of their own inquiry. As a result of this delegation and other delegations of authority to the Division Director and senior enforcement staff, the staff can start a formal investigation, subpoena anyone for anything, enforce the subpoena judicially and close the matter with no Commission involvement or oversight.

READ MORE »

Subprime Crisis and Board (In-)Competence

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 1, 2010
, , , , , ,
More from: , ,

The following post comes to us from Harald Hau of the Finance Department at INSEAD and Marcel Thum, Professor of Business and Economics at TU Dresden.

In the paper, Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany, which was recently made publicly available on SSRN, we examine evidence for a systematic underperformance of Germany’s state-owned banks in the current financial crisis and study if the bank losses can be traced to the quality of bank governance.

For this purpose, we examine the biographical background of 593 supervisory board members in the 29 largest banks and find a pronounced difference in the finance and management experience of board representatives across private and state-owned banks. Measures of “boardroom competence” are then related directly to the magnitude of bank losses in the recent financial crisis. Our data confirms that supervisory board (in-)competence in finance is related to losses in the financial crisis.

READ MORE »

Proxy Plumbing Fixes are Desperately Needed

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Tuesday, August 31, 2010
, , , , ,
More from: , ,

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal. Other posts on proxy plumbing are available here.

The U.S. proxy system is set to undergo a comprehensive review for the first time in nearly 30 years. The Securities and Exchange Commission (SEC) recently voted unanimously to issue a concept release “seeking public comment on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency.” [1] This so-called “proxy plumbing” concept release marks the beginning of what will certainly be a years-long process with an emphasis on fact-finding to examine the effects of shifts in “shareholder demographics, the structure of share holdings, technology, and the potential economic significance of each proxy vote.” [2]

READ MORE »

Finally, Governance Becomes Possible

Posted by Ira Millstein, Well Gotshal & Manges LLP, and Stephen Davis, Yale School of Management, on
Monday, August 30, 2010
, ,
More from: , ,

Ira Millstein is a partner at Well Gotshal & Manges LLP and Senior Associate Dean for Corporate Governance of the Yale School of Management. Stephen Davis is executive director of Yale’s Millstein Center for Corporate Governance and Performance.

Thirty years late, the new Dodd-Frank Act hands shareholders power to influence the composition of boards and shape CEO pay. But will these institutional investors, on whom Americans depend for their financial security, use their authority responsibly? Will corporate boards welcome and accept good faith dialogue with their shareholders? Will both sides forego short term financial engineering and align for the long term performance the country badly needs?

For decades, investors, anxious about a company gone awry, have had little choice but to complain from the sidelines, petitioning finger-wagging resolutions directors could easily ignore. Shareholders tried that to no avail at AIG before its epic collapse. Defenses fortified under-performing boards from pressure they should have faced to better control risks and tie CEO pay to measurable actual performance over time. But resolutions and defenses did not stop short-term funds that piled disabling debt on companies. Aggressive investors could cherry-pick firms for proxy fights or use stock techniques to harass. Long term institutional investors were shackled; the short term prevailed. One result: Too many boards tolerated management excesses and failures that ushered in the financial crisis.

READ MORE »

Corporate Tax Avoidance and Stock Price Crash Risk

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, August 30, 2010
, , ,
More from: ,

The following post comes to us from Jeong-Bon Kim, Professor of Accountancy at City University of Hong Kong; Yinghua Li of the Accounting Department at Purdue University; and Liandong Zhang of the Department of Accountancy at City University of Hong Kong.

In the paper, Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis, which is forthcoming in the Journal of Financial Economics, we examine the association between the extent of a firm’s tax avoidance and its future stock price crash risk. Recently, Desai, Dyck, and Zingales (2007) and Desai and Dharmapala (2006) put forth a “theft and taxes” idea: Complex tax avoidance arrangements can provide management with the tools, masks, and justifications for rent-diverting activities, such as earnings manipulation, unauthorized compensation, and insider trading. The purpose of our paper is to test this “theft and taxes” idea in the context of stock price crash risk.

READ MORE »

Regulating UK Bankers’ Pay

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, August 29, 2010
, , , , ,
More from: ,

This post comes to us from John J. Cannon, a partner in the Executive Compensation and Employee Benefits Group Shearman & Sterling LLP, and is based on a Shearman & Sterling Client Memorandum.

Introduction

On 29 July 2010, the UK’s Financial Services Authority (the “FSA”) published a consultation paper which sets out proposals to make significant amendments to its existing Remuneration Code (the “Code”). [1] If implemented in the proposed form, these revisions will have a significant impact on how remuneration policies and practices at UK financial institutions (and some foreign financial institutions operating in the UK) are operated. In particular, the revisions will mean that the Code will now be significantly expanded in its scope of application and will introduce relatively prescriptive rules on bonus deferrals, proportions of bonuses that must be paid in shares and guaranteed bonuses.

READ MORE »

Dodd-Frank’s Dangers and the Case for a Systemic Emergency Insurance Fund

Posted by Jeffrey N. Gordon, Columbia Law School, on
Saturday, August 28, 2010
, , ,
More from:

Jeffrey Gordon is the Alfred W. Bressler Professor of Law at Columbia Law School.

In light of the liquidation strategy for failing financial firms set forth in Dodd-Frank, I have now posted a revised version of a forthcoming article calling for a “Systemic Emergency Insurance Fund” to augment the FDIC’s resolution authority. This version, co-authored with Chris Muller, is entitled Confronting Financial Crisis: Dodd-Frank’s Dangers and the Case for a Systemic Emergency Insurance Fund; the paper has been accepted for publication in the Yale Journal on Regulation in Winter 2011.

The paper frames its case for a “Systemic Emergency Insurance Fund” in contrast to the seriously flawed, even dangerously flawed, approach of Dodd-Frank. In the next financial crisis the likely outcome will be serial receiverships imposed on many of the largest financial firms, a nationalization of much of the US financial sector. Apart from disruption to the real economy, this strategy is likely to increase the incidence of financial crises and will dangerously destabilize world financial markets. These are strong claims, but argument flows directly from the decision in Dodd-Frank to make an FDIC receivership the exclusive mechanism of providing support to troubled financial firms, stripping away much of the Fed’s and FDIC’s prior authority to provide systemic support in a financial crisis. Having entrusted the regulators with enormous discretion in the implementation of Dodd-Frank, the legislation withdraws that trust at the moment of systemic emergency, in the name of eliminating bailouts and stamping out moral hazard.

READ MORE »

Proxy Access Rule Will Lead to Greater Controversy

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, August 27, 2010
,
More from:
Editor’s Note: Kathleen L. Casey is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Casey’s statement at a recent open meeting of the SEC, which is available here. The views expressed in the post are those of Commissioner Casey and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. The post relates to the adoption of a final SEC rule on proxy access; the adopting release is available here. Additional posts relating to proxy access are available here.

Let me start with an observation and a prediction. The observation is that it appears that a primary, if unstated, objective of this rule is to put the issue of proxy access behind the Commission once and for all. My prediction is that, paradoxically, the rule that the Commission adopts today virtually guarantees that the Commission will be forced to deal with this issue for years to come. I say this for two reasons. First, I believe that the rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny. Second, an inevitable consequence of this rule, if it survives, is that the staff will be tasked with the unenviable responsibility of brokering disputes and addressing a broad array of issues arising from the operation of this new federal right every proxy season.

This result is unfortunate, because it was so clearly avoidable — it was not a necessary consequence of adopting a rule that would truly facilitate shareholders’ state law rights to nominate directors.

READ MORE »

Enhancing Corporate Suffrage Through Proxy Access

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, August 27, 2010
,
More from:
Editor’s Note: Elisse B. Walter is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Walter’s statement at a recent open meeting of the SEC, which is available here. The views expressed in the post are those of Commissioner Walter and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. The post relates to the adoption of a final SEC rule on proxy access; the adopting release is available here. Additional posts relating to proxy access are available here.

While a great many things in our financial markets have changed since the day I first joined the Securities and Exchange Commission in 1977 as a baby lawyer in our Office of General Counsel, one thing has remained the same — shareholders still do not have a real say in determining who will oversee management of the companies they own. A shareholder today exercising her franchise right has no choice among candidates. Yet, voting necessarily assumes a choice.

For far too long, shareholders have been effectively shut out of the director nomination and election process. And, since 1934 when Congress extended proxy authority to the Commission, our proxy rules have failed to facilitate — in fact, have frustrated — shareholders’ efforts to carry out their franchise rights to nominate and elect directors that they select.

READ MORE »

Page 13 of 46
1 … 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 … 46