Yearly Archives: 2010

Review Links Corporate and Securities Law and Human Rights

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, July 27, 2010
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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.

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Determinants of CEO Pay

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, July 26, 2010

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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.

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Forum Non Conveniens Defeats Shareholder Litigation on Cross-Border Mergers

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, July 25, 2010
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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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Sustainability in the Boardroom

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, July 24, 2010
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This post comes to us from Matteo Tonello, Director of Corporate Governance for The Conference Board, Inc., and is based on a paper by Mr. Tonello titled Sustainability in the Boardroom, which is available here.

In a recent paper, Sustainability in the Boardroom, published as part of the Conference Board’s Director Notes series, I discuss the findings from a survey of board practices in the area of sustainability by 50 public companies of different industries and revenue groups.

The survey revealed flaws in how corporate boards oversee their companies’ social and environmental initiatives. In particular, what appears to be largely missing is access to independent sources of information on the impact of business operations on the environment as well as detailed procedures and metrics for integrating social objectives into daily corporate activities. Directors mostly rely on reports by senior executives (89.2 percent of respondents) and almost never use additional sources (including peer-company benchmarks, environmental reports, director education programs, and consultants) that would help them critically verify and analyze any internally produced information on these matters. For most companies, sustainability discussions with the board only take place in reaction to emergency situations like the oil spill in the Gulf.

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The Future of Institutional Share Voting: Three Paradigms

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Friday, July 23, 2010
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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 recent Latham Corporate Governance Commentary, and follows up on an earlier Latham Commentary, The Parallel Universes of Institutional Investing and Institutional Voting, which is available here.

In a recent Corporate Governance Commentary, titled “The Parallel Universes of Institutional Investing and Institutional Voting, [1]” we observed the increasing discontinuity at most institutional equity investors between the persons who make the buy and sell decisions (or who create and maintain the quantitative models that make those decisions) and those who make the decisions on how to vote portfolio shares. We analogized the separation of the two functions to parallel universes to highlight the autonomous nature of each function. While we noted that this pattern is not universal among institutional equity investors, we stated our belief that it is the prevailing method by which institutional investors solve the financial dilemma created by the large, and for some institutions literally overwhelming, number of votes they are required to cast each proxy season by the federal government’s imposition of a fiduciary duty to vote all portfolio shares on all matters brought to shareholders.

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Bankruptcy and the Collateral Channel

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, July 23, 2010

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This post comes to us from Efraim Benmelech of the Department of Economics at Harvard University and Nittai Bergman of the Department of Finance at MIT.

In the paper, Bankruptcy and the Collateral Channel, which is forthcoming in the Journal of Finance, we investigate whether bankrupt firms affect their competitors in a causal manner or whether the observed adverse effects merely reflect changes in the economic environment faced by the industry at large. Using a novel dataset of secured debt tranches issued by U.S. airlines, we provide empirical support for the collateral channel.

Airlines in the U.S. issue tranches of secured debt known as Equipment Trust Certificates (ETCs), Enhanced Equipment Trust Securities (EETCs), and Pass Through Certificates (PTCs). We construct a sample of aircraft tranche issues and then obtain the serial number of all aircraft that were pledged as collateral. For each of the debt tranches in our sample we can identify precisely its underlying collateral. We then identify the ‘collateral channel’ off of both the time-series variation of bankruptcy filings by airlines, and the cross-sectional variation in the overlap between the aircraft types in the collateral of a specific debt tranche and the aircraft types operated by bankrupt airlines. The richness of our data – which includes detailed information on tranches’ underlying collateral and airlines’ fleets – combined with the fairly large number of airline bankruptcies in our sample period, allows us to identify strategic externalities that are likely driven by a collateral channel rather than by an industry shock to the economic environment.

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Meeting the Challenge of Nimble and Effective Regulation

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, July 22, 2010
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Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Schapiro’s recent remarks at the National Conference of the Society of Corporate Secretaries and Governance Professionals, which are available here in their entirety. The views expressed in the post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Society has long been a force for positive change. In fact, your members have played an important role in ensuring that attitudes and practices change as the business and economic environments evolve—a role that may be as important today as it has been at any point in your history.

Your importance within the corporate structure speaks to my reason for coming today. I’m here to talk about change—to remind you why we need it, to tell you how the SEC has embraced it, and to ask for your input as we embark upon new changes going forward.

The events of the last two years have transformed our world. Your companies, the SEC, the markets and our nation, all changed in significant ways, and on short notice, as each of us strove to react to the most significant economic crisis of our lifetimes.

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Dodd-Frank Act Becomes Law

Posted by William Sweet, Skadden, Arps, Slate, Meagher & Flom LL, on
Wednesday, July 21, 2010

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William Sweet is a partner at Skadden, Arps, Slate, Meagher & Flom LLP concentrating in financial institution merger and acquisition, regulatory and enforcement matters. This post is extracted from Skadden’s analysis of the Dodd-Frank Act, which was signed into law today by President Obama. Skadden’s materials, The Dodd Frank Act: Commentary and Insights, are a collection of commentaries coordinated by Mr. Sweet, which summarize and analyze the Dodd-Frank Act; they are available here. Other posts relating to the Dodd-Frank Act are available here.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (henceforth, the “Dodd-Frank Act”), was signed into law by President Obama on Wednesday July 21, 2010. The Act spans over 2,300 pages and affects almost every aspect of the U.S. financial services industry. The objectives ascribed to the Act by its proponents in Congress and by the President include restoring public confidence in the financial system, preventing another financial crisis, and allowing any future asset bubble to be detected and deflated before another financial crisis ensues.

The Dodd-Frank Act effects a profound increase in regulation of the financial services industry. The Act gives U.S. governmental authorities more funding, more information and more power. In broad and significant areas, the Act endows regulators with wholly discretionary authority to write and interpret new rules.

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SEC Prohibits “Pay to Play” for Investment Advisers and Fund Managers

Posted by Jack S. Levin, Kirkland & Ellis LLP, on
Wednesday, July 21, 2010
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Jack S. Levin is a partner at Kirkland & Ellis LLP, and is regularly a visiting lecturer at Harvard Law School. This post is based on a Kirkland Private Equity Newsletter article by Mr. Levin, Scott A. Moehrke and Nabil Sabki.

On June 30, 2010, the SEC adopted a rule designed to proscribe “pay-to-play” practices by investment advisers (covering virtually all investment advisers, whether or not registered under the Investment Advisers Act— the “IAA”) and many of their employees (called “covered associates”). [1]

In summary, the rule prohibits:

  • (1) A private fund’s investment adviser from receiving compensation (e.g., management fees or carried interest) from a state or local government agency [2] investment plan or program (e.g., a government employees retirement plan or apparently some state university endowment funds) (referred to herein as a “government plan”) for two years after the fund or a covered associate has made a political contribution to a state or local government official or candidate (referred to herein as “an influential government official or candidate”) who could influence the government plan to invest in the private fund.
  • (2) A private fund’s investment adviser and its covered associates from soliciting a political contribution to such an influential government official or candidate or to a political party of a state or locality where the investment adviser provides (or seeks to provide) advisory services to a government plan.
  • (3) A private fund’s investment adviser and its covered associates from paying a third-party placement agent or other solicitor to solicit a government plan to invest in the private fund, unless such third party is an SEC-registered broker-dealer or investment adviser subject to comparable “pay-to-play” restrictions.

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Why Are CEOs Rarely Fired?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, July 21, 2010
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This post comes to us from Lucian Taylor of the Finance Department at the University of Pennsylvania.

In the paper, Why Are CEOs Rarely Fired? Evidence from Structural Estimation, which is forthcoming in the Journal of Finance, I evaluate the forced CEO turnover rate and quantify effects on shareholder value by estimating a dynamic model. The model features costly turnover and learning about CEO ability. To fit the observed forced turnover rate, the model needs the average board of directors to behave as if replacing the CEO costs shareholders at least $200 million.

I find three main results. First, the empirical forced turnover rate is low, in the sense that the model needs large turnover costs to fit the data. Second, these costs mainly reflect CEO entrenchment rather than a real cost to shareholders. According to the model, eliminating this entrenchment would raise shareholder value by 3%, assuming we could hold all else constant.

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