Yearly Archives: 2010

A United Nations Blueprint to Promote Human Rights

Posted by Martin Lipton and Kevin S. Schwartz, Wachtell, Lipton, Rosen & Katz, on
Thursday, December 2, 2010
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. Kevin Schwartz is an associate at Wachtell Lipton. This post discusses a draft of principles to implement the United Nation’s “Protect, Respect and Remedy” Framework; that draft, which is now open to comment, is available here.

Over the past decade, the United Nations has focused considerable attention on the protection of human rights in the conduct of global business. Leading this effort has been John Ruggie, a professor from Harvard’s Kennedy School of Government who was appointed Special Representative to the U.N. Secretary-General. In 2008, the U.N. Human Rights Council embraced a framework that broadly conceived of distinct responsibilities for Nations and businesses in the prevention of human rights abuses. But the Council also called on the Special Representative to provide guidance on how Nations and businesses practically may implement the nascent proposal’s broad-textured commitments. Based on extensive research and diverse stakeholder consultations, the Special Representative recently released for public review and comment a potentially significant blueprint — Guiding Principles for the Implementation of the United Nations “Protect, Respect and Remedy” Framework — that begins to define how Nations and businesses may operationalize the ideals of the U.N. framework. This draft report’s sensible guidance will be widely applauded.

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Corporate Law and Political Spending

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Wednesday, December 1, 2010
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Lucian Bebchuk is a Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is an Associate Professor of Law at Columbia Law School. This post is based on their paper “Corporate Political Speech: Who Decides?” available here.

Last week we presented our article, Corporate Political Speech: Who Decides?, at the Harvard Law Review’s annual Supreme Court Forum. The article is featured in the Review’s Supreme Court issue.

The final version of the paper includes a substantial addition from prior versions: A section assembling empirical evidence on the potential financial significance of political speech. The evidence shows that there is a basis for believing that public corporations may expend material amounts of corporate resources on political speech—and that, using the expanded freedom provided under recent Supreme Court decisions, may well spend even more in the future.

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Pricing Corporate Governance

Posted by Lucian Bebchuk, Harvard Law School, on
Tuesday, November 30, 2010
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Lucian Bebchuk is Professor of Law, Economics, and Finance and Director of the Corporate Governance Program at Harvard Law School. This post is Professor 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 draws on his study with Alma Cohen and Charles C.Y. Wang, “Learning and the Disappearing Association between Governance and Returns,” available here.

Do markets appreciate and correctly price the corporate-governance provisions of companies? In new empirical research, Alma Cohen, Charles C.Y. Wang, and I show how stock markets have learned to price anti-takeover provisions. This learning by markets has important implications for both managements of publicly traded companies and their investors.

In 2001, three financial economists – Paul Gompers, Joy Ishii, and Andrew Metrick – identified a governance-based investment strategy that would have yielded superior stock-market returns during the 1990’s. The strategy was based on the presence of “entrenching” governance provisions, such as a classified board or a poison pill, which insulate managements from the discipline of the market for corporate control.

During the 1990’s, holding shares of firms with no or few entrenching provisions, and shorting shares of firms with many such provisions, would have outperformed the market. These findings have intrigued firms, investors, and corporate-governance experts ever since they were made public, and have led shareholder advisers to develop governance-based investment products.

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Premium Pay for Executive Talent

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, November 29, 2010
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The following post comes to us from Mary Ellen Carter of the Accounting Department at Boston College, Francesca Franco of the Accounting Department at London Business School, and Irem Tuna of the Accounting Department at London Business School.

In the paper, Premium Pay for Executive Talent: An Empirical Analysis, which was recently made publicly available on SSRN, we study the extent to which executive talent affects executive compensation design. Although the effect of executive-specific characteristics on firm choices and outcomes is the subject of a large literature in organizational theory, economics, and finance, not much direct evidence is available on the association between executive-specific characteristic of talent and compensation contracts.

We derive three proxies to capture the executive’s talent using principal components analysis. The first component captures the “perceived” dimension of talent, based on whether the executive was a CEO at the previous firm, tenure in a prior top position, excess pay at the previous firm, and the press coverage while at the previous firm. Our other two proxies capture measurable outcomes of actions at the prior employer. One measures talent using accounting and stock price performance at the prior firm. The other captures talent by relying on reporting quality, namely whether the prior firm has been subject to an AAER or has restated its earnings.

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Test-Driving a Hybrid Go-Shop

Posted by David Fox, Kirkland & Ellis LLP, on
Sunday, November 28, 2010
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David Fox is a partner at Kirkland & Ellis LLP, focusing on complex mergers and acquisitions as a member of that firm’s Corporate Group. This post is based on a Kirkland & Ellis M&A Update by Mr. Fox and Daniel Wolf.

By now dealmakers are no doubt familiar with the “go-shop” which gained popularity during the 2006-2008 LBO boom as an alternative formulation to the traditional “no-shop” in sale agreements for public company targets. In a number of recent strategic deals an interesting hybrid formulation has been used under which the traditional no-shop prohibitions on post-announcement active solicitation of competing offers apply but the bifurcated termination fee structure feature of the go-shop is used, with a lower break-up fee applying in the event the topping bid surfaces during a defined initial period after the deal signing.

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Synthetic Ownership Arrangements for Ambush Equity Accumulation

Posted by Adam O. Emmerich, Wachtell Lipton Rosen & Katz, on
Saturday, November 27, 2010
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Adam Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz focusing primarily on mergers and acquisitions and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Emmerich and William Savitt. A portion of their memo was quoted in a recent DealBook column from the New York Times, available here.

We have recently witnessed equity accumulations on both sides of the Atlantic that were first announced long after they began and long after the acquiring parties had effectively passed applicable disclosure thresholds.  Here in the U.S., Pershing Square and Vornado earlier this month announced a combined stake of almost 27% in J.C. Penney.  And last weekend French luxury-goods conglomerate LVMH announced that it had amassed a previously undisclosed stake in excess of 14% in Hermès, including through transactions extending over a period of years.  Although the details of both accumulation programs are as yet not fully known, they appear to have been conducted on the assumption that the U.S. and French regulatory regimes requiring prompt and current disclosure of share accumulations can be evaded through derivatives and other synthetic and structured ownership arrangements, even when they involve ownership of actual shares by counterparties, up until the point when such trades are settled by taking options on or physical delivery of the underlying shares.

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Ownership Structure and the Cost of Corporate Borrowing

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, November 26, 2010
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The following post comes to us from Chen Lin, Professor of Finance at the Chinese University of Hong Kong; Yue Ma, Professor of Economics at Lingnan University, Hong Kong; Paul Malatesta, Professor of Finance at the University of Washington; and Yuhai Xuan, Assistant Professor of Business Administration at the Finance Unit of Harvard Business School.

In the paper, Ownership Structure and the Cost of Corporate Borrowing, forthcoming in the Journal of Financial Economics, we study the financial consequences of the divergence between control rights and cash-flow rights in a large sample of companies across 22 East Asian and Western European countries during the period from 1996 to 2008. Specifically, we analyze the effects of control rights-cash-flow rights divergence on firms’ cost of borrowing and provide new insights into the link between the separation of ownership and control and corporate value.

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The (Agency) Problem of Risk Incentives within Financial Institutions

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, November 24, 2010
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The following post comes to us from Sjoerd van Bekkum of the Finance Department at New York University and the Erasmus School of Economics at Erasmus University.

In the paper, Downside Risk and Agency Problems in the U.S. Financial Sector: Examining the Effect of Risk Incentives from 2007 to 2010, I consider risk incentives within financial institutions in the presence of two types of potential agency problems: the standard manager-shareholder agency problem and the risk-shifting problem between shareholders and society. First, I evaluate the effect of risk incentives on shareholder returns during the financial crisis. Next, I examine the relation between risk incentives and three downside risk statistics. Value-at-risk resembles a financial institution’s tolerance to losses, expected shortfall resembles losses when the firm does poorly, and marginal expected shortfall resembles an institution’s exposure to loss spillovers from its peers.

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SEC Shapes New Disclosure Requirements

Posted by H. Rodgin Cohen, Sullivan & Cromwell LLP, on
Tuesday, November 23, 2010
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H. Rodgin Cohen is a partner and chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication. The proposed rules discussed in this post can be found here.

At an open meeting in September, the SEC voted to propose rules that would require a public company to provide certain enhanced disclosures about its short-term borrowings in its filings with the SEC. The SEC also voted to approve the issuance of an interpretive release to provide guidance regarding the SEC’s current disclosure requirements in the MD&A relating to liquidity and capital resources. The objective of these initiatives is to address so-called “balance sheet window-dressing” by requiring disclosure about a public company’s leverage and liquidity throughout the course of the relevant reporting period rather than only at period-end.

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How to Fix Bankers’ Pay

Posted by Lucian Bebchuk, Harvard Law School, on
Monday, November 22, 2010
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Lucian Bebchuk is a Professor of Law, Economics, and Finance at Harvard Law School.

In a recent essay, written for a special issue of the American Academy of Arts and Sciences’ Daedalus journal on lessons from the financial crisis, I discuss how bankers’ pay should be fixed.

The essay, How to Fix Bankers’ Pay, discusses two distinct sources of risk-taking incentives: first, executives’ excessive focus on short-term results; and, second, their excessive focus on results for shareholders, which corresponds to a lack of incentives for executives to consider outcomes for other contributors of capital. I then discuss how pay arrangements can be reformed to address each of these problems and conclude by examining the role that government should play in bringing about the needed reforms.

The essay is available here. It draws on, and provides an accessible summary of the analysis developed in, three studies:

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