Yearly Archives: 2010

Corporate Governance: Past, Present, & Future

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, March 4, 2010

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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.

The Vision

The modern business corporation emerged as the first institutional claimant of significant unregulated power since the nation state established its title in the sixteenth and seventeenth centuries.
—Abe Chayes [1]

Abe Chayes, a former Kennedy administration official and long-time Harvard Law professor, wrote those words at the outset of what might be thought of as America’s own “Thirty Glorious Years” — that three-decade span from the late seventies through 2008 when it seemed possible that private enterprise could operate on a global stage, free from the constraints of governmental regulation and oversight. The vision was simple and stirring, and in many ways irresistible: Corporate efficiency could co-exist with democracy.

Writing in the Stanford Law Review, another professor, David Engel, [2] precisely articulated the standards to which corporations would need to subscribe in order to legitimate this unregulated power within a democratic society:

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Private Equity and Industry Performance

Posted by Josh Lerner, Harvard Business School, on
Thursday, March 4, 2010
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Josh Lerner is a Professor of Investment Banking at Harvard Business School.

In this paper, Private Equity and Industry Performance, which was recently published on SSRN, my co-authors, Shai Bernstein, Morten Sørensen, and Per Strömberg, and I examine the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007. We focus on whether PE investments in an industry affect aggregate growth and cyclicality. In particular, we look at the relationship between the presence of PE investments and the growth rates of productivity, employment and capital formation. For our productivity and employment measures, we find that PE investments are associated with faster growth. One natural concern is that this growth may have come at the expense of greater cyclicality in the industry, which would translate into greater risks for investors and stakeholders. Thus, we also examine whether economic fluctuations are exacerbated by the presence of PE investments, but we find little evidence that this is the case.

Throughout our analysis, we measure the growth rate in a particular industry relative to the average growth rate across countries in the same year. In addition, we use country and industry fixed effects, so that the impact of PE activity is measured relative to the average performance in a given country, industry, and year. For instance, if the Swedish steel industry has more PE investment than the Finnish one, we examine whether the steel industry in these two countries performs better or worse over time relative to the average performance of the steel industry across all countries in our sample, and whether the variations in performance over the industry cycles are more or less dramatic.

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After the Financial Crisis: Fixing the Market and Regulatory Failures

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, March 3, 2010

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Editor’s Note: Eliot Spitzer is the former Governor of New York. This post is based a speech delivered by Mr. Spitzer at Harvard University’s Edmond J. Safra Foundation Center for Ethics; an essay adapted from the speech recently appeared in the Boston Review.

Every day we read the headlines, feel the tensions, observe the consequences of the recent failures of markets and government. Having a serious conversation about how to remedy these failures lies at the heart of current American politics. Among the questions that conversation should address are whether our response to the immediate crisis has been successful, and how might we restore an effective structure for corporate governance. The failures of corporate governance account for much of our economic troubles over the past 30 years. Getting out of the current mess will require addressing these underlying failures.

Regarding the question of whether government intervention related to the current crisis has been appropriate and effective, perhaps not surprisingly, my conclusion is that it has not. When our economic world appeared to collapse, there was absolutely no question that an enormous sum of money was going to be spent creating solvency and liquidity; money needed to be pushed into the system. On that premise, there was universal agreement. And when it was done — the number $24 trillion is thrown about when you aggregate the straight cash given out, the guarantees, the money we printed — everyone cheered.

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Just Say NOL: Delaware Upholds 4.99% Rights Plan to Protect NOLs

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, March 3, 2010
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Editor’s Note: Theodore Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Mirvis, Eric S. Robinson, William Savitt and Ryan A. McLeod, regarding the recent decision of the Delaware Court of Chancery in Selectica, Inc. v. Versata Enters., Inc.; the opinion 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.

Friday’s decision by the Delaware Court of Chancery in the Selectica case upheld the use of a rights plan with a 4.99% trigger designed to protect the company’s net operating loss carryforwards (NOLs), even when the challenger had busted through the threshold and suffered the pill’s dilutive effect. Selectica, Inc. v. Versata Enters., Inc., C.A. No. 4241-VCN (Del. Ch. Feb. 26, 2010). Vice Chancellor Noble’s post-trial decision carefully considered the particular circumstances inherent in using a pill to protect NOLs, but it also contains much of importance to Delaware takeover doctrine generally. The decision confirms that rights plans remain an important bulwark, notwithstanding continued attacks from academic and other quarters.

Although Selectica never achieved an operating profit, it had generated NOLs of approximately $160 million. These NOLs could have substantial value in the event the company becomes profitable or merges with a profitable company, but under IRC § 382 they can be adversely affected if the company experiences an “ownership change” of over 50% during a three-year period (measured by reference to holders of 5% or larger blocks).

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Bundling and Entrenchment

Posted by Lucian Bebchuk, Harvard Law School, and Ehud Kamar, University of Southern California, on
Tuesday, March 2, 2010
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In a recently issued discussion paper, “Bundling and Entrenchment,” we present the first empirical study of the bundling problem in corporate law. The paper, which will be published in the May 2010 issue of the Harvard Law Review, is available here.

Our study provides empirical evidence that managements have been using bundling to introduce antitakeover defenses that shareholders would likely reject if they were to vote on them separately. We study a hand-collected dataset of public mergers during 1995–2007. While shareholders were strongly opposed to staggered boards during this period, and generally unwilling to approve charter amendments introducing a staggered board on a stand-alone basis, the planners of these mergers often bundled them with a move to a staggered board. We demonstrate that management has the practical ability to obtain management-favoring charter provisions by bundling them with other measures, and we discuss the significant implications our findings have for corporate law theory and policy.

The Bundling Problem

A widely shared premise in the literature on corporate law and corporate governance is that charter provisions are those viewed by shareholders as efficient. The basis for this view is the assumption that these provisions receive at least implicit shareholder support. When firms go public, investors are presumed to price the provisions contained in the company’s charter; as a result, the founders who take the company public have an incentive to fully take into account shareholders’ preferences. After the company goes public, any amendment to the charter requires shareholder approval. This procedure is presumed to ensure that amendments to the charter are those favored by shareholders.

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Is Pay Too High and Are Incentives Too Low?

Posted by John Core, University of Pennsylvania, on
Monday, March 1, 2010
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John Core is a Professor of Accounting at the University of Pennsylvania.

In this paper, Is Pay Too High and Are Incentives Too Low? A Wealth-Based Contracting Framework, which was recently published on SSRN, my co-author, Wayne Guay, and I describe a wealth-based contracting framework useful in structuring executive compensation and incentives.  In the wake of the recent financial crisis, US executive compensation has, once again, come under fire from regulators, politicians, the financial press, the general public, and some academics. Although the critiques are varied, many identify the level of pay and performance-based incentives as two key areas of concern. And, as is often the case in the wake of a crisis, proposals have been put forward to resolve the “problems” with executive pay and incentives. A deficiency with all of these proposals, however, is the failure to articulate a framework for determining the appropriate level of executive incentives. Rather, the proposals simply discuss ways firms or regulators might get executives to hold greater incentives without identifying how one should determine whether or when an executive has enough (or too much) incentives.

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Corporate Governance and the Financial Crisis: Causes and Cures

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Sunday, February 28, 2010
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Editor’s Note: Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is a summary of a discussion hosted by Mr. Mirvis at the Corporate Directors Forum at the University of San Diego; the slides from that presentation are available here.

A recent discussion that I moderated at the Corporate Directors Forum at the University of San Diego focused on the changing regulatory landscape triggered by the financial crisis. The focus was on the changing rhetoric in the corporate governance debate, and whether the rhetoric matches the proposals being advanced – i.e., does the “talk-the-talk” fit with the “walk-the-walk”.

The presentation that framed the discussion first outlined current legislative and regulatory proposals for changes in corporate governance, including changes regarding board structure, director elections, shareholder proxy access, risk management and compensation. The current corporate governance landscape includes proposed or actual reforms to these areas from federal legislation, SEC rule-making, state corporate legislation, changes to New York Stock Exchange rules, and stockholder proposals. The presentation mentioned recent comments on the regulatory and legislative landscape, including the following:

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International Experts Form Council on Global Financial Regulations

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Saturday, February 27, 2010
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Editor’s Note: This post draws on an article that first appeared on the Harvard Law School website.

Hal Scott, the Nomura Professor and director of the Program on International Financial Systems at Harvard Law School, has been named co-chair of the newly-organized Council on Global Financial Regulation. The Council has been formed by a group of private sector international financial leaders to provide national and international policymakers with independent recommendations from outside government for effective regulation of the global financial system, particularly regulation with significant cross-border implications.

According to a statement released by the Council on Global Financial Regulation, the Council believes that the worldwide financial crisis demonstrates that sound financial regulation must be achieved through international cooperation. Government leaders have called for a greater role for the G-20 and other international government bodies, such as the Financial Stability Board, to encourage a better coordinated international financial regulatory system. The Council aims to play a constructive role in supporting that process by providing government policymakers and regulators with independent recommendations, research, analysis and commentary. The Council also aims to be available for consultation with government officials as a resource on cross-border financial regulatory issues.

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Increasing International Cooperation and Other Key Trends in Anti-Corruption Investigations

Posted by John F. Savarese, Wachtell, Lipton, Rosen & Katz, on
Friday, February 26, 2010

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John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton client memorandum by Mr. Savarese, Ralph M. Levene and Carol Miller.

Last Fall, we noted that countries other than the United States were stepping up their efforts to combat international bribery and corruption. (See International Anti-Corruption Enforcement on the Rise – October 19, 2009.) Consistent with that trend, earlier this week the U.K. Serious Fraud Office in conjunction with the U.S. Department of Justice settled corruption charges with BAE Systems PLC, one of Europe’s largest defense contractors (learn more here). The charges relate to illegal payments to government officials in various countries. Under the terms of the settlements BAE will plead guilty to charges in both countries and pay $400 million to resolve U.S. charges, and a fine of £30 million – a record criminal fine for a company in the U.K. – to resolve the SFO investigation. The BAE settlement marks the first time that the SFO and DOJ have cooperated to jointly resolve an investigation and the SFO has called it a “groundbreaking global agreement.”

In another illustration of this trend, 22 executives and employees of 16 different companies in the military and law enforcement products industry based in the U.S., the U.K. and Israel were arrested on January 18, 2010 and charged with FCPA violations as a result of an undercover operation conducted by the FBI and DOJ, with assistance from the U.K.’s City of London Police (learn more here). According to the indictments, the defendants attempted to make improper payments to FBI agents posing as foreign procurement officials. The case represents the largest single investigation and prosecution in the history of DOJ’s enforcement of the FCPA. It also represents the first large-scale use of undercover law enforcement techniques, previously seen only in organized crime cases, to uncover FCPA violations.

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Corporate Political Speech is Bad for Shareholders

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, February 25, 2010

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Editor’s Note: This post is Lucian Bebchuk’s most recent op-ed in his series of monthly columns titled “The Rules of the Game” for the international association of newspapers Project Syndicate, which can be found here. This op-ed draws on his study with Zvika Neeman, “Investor Protection and Interest Group Politics,” forthcoming in The Review of Financial Studies.

The United States Supreme court recently struck down limits on the freedom of companies to spend money on political elections. Large, publicly traded companies in other countries also often face lax limits on their use of corporate resources to influence political outcomes, fueling fears that the interests of shareholders will trump those of other groups, such as consumers and employees. But corporate spending on politics can also hurt the interests of shareholders.

Stock market listed companies control a big share of almost every country’s resources, so the free flow of corporate money into politics can have a profound impact on politicians’ preferences and choices. In particular, the influence of corporations on politicians and political outcomes can be expected to weaken the rules that protect shareholders and ensure that companies are well-governed.

To understand why, it is important to focus on the individuals who make decisions for companies. When corporations decide which politicians to support, what kind of messages to send, and which political outcomes to seek, their general investors are not consulted. Rather, such decisions are likely to reflect the preferences and objectives of the insiders who manage the companies, ostensibly on shareholders’ behalf. And politicians that benefit from corporate spending and access to corporate resources will have an interest in serving the insiders’ preferences and objectives.

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