Yearly Archives: 2011

Accounting Standards and Debt Covenants

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, September 26, 2011
, , , , , , ,
More from:

The following post comes to us from Peter Demerjian of the Goizueta Business School at Emory University.

In the paper, Accounting Standards and Debt Covenants: Has the “Balance Sheet Approach” Led to a Decline in the Use of Balance Sheet Covenants?, forthcoming in the Journal of Accounting and Economics as published by Elsevier, I examine whether the “balance sheet approach” has led to a decline in the use of balance sheet covenants. Debt contracts, and especially private loan agreements, frequently include accounting-based debt covenants. Many of these covenants require the borrower to maintain a threshold level of some financial ratio or measure. A broad range of financial measures are employed in these financial covenants. Some are written on earnings from the income statement; the borrower may be required to maintain a minimum level of earnings relative to their interest expense (interest coverage) or their total debt (debt-to-earnings). Similarly, covenants are also written on values from the balance sheet; these include covenants requiring a minimum level for the book value of equity (net worth) or a maximum amount of debt in the capital structure (leverage). If the borrower fails to maintain a covenant threshold, the debt enters technical default. In technical default, the creditor has the option to attempt action against the borrower; a common consequence is renegotiation with stricter contract terms.

READ MORE »

CFTC Finalizes Whistleblower Bounty Program

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, September 25, 2011
, , ,
More from: , ,

The following post comes to us from Mark D. Young, partner in the Derivatives Regulation and Litigation Group at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden, Arps memorandum by Mr. Young, Prashina J. Gagoomal, and Timothy S. Kearns.

On August 4, 2011, the Commodity Futures Trading Commission (CFTC or Commission) voted 4-1 to adopt final regulations implementing the whistleblower incentives and protections set forth in Section 748 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). See 76 Fed. Reg. 53172 (Aug. 25, 2011) (to be codified at 17 C.F.R. Part 165). The CFTC’s whistleblower program generally obligates the CFTC to pay a bounty to whistleblowers who provide information leading to the assessment of monetary sanctions against those found to have violated the Commodity Exchange Act (CEA). The reach of the whistleblower provisions is quite broad — they apply to “any individual” (not just employees of companies) and to information regarding any possible violation of the CEA. Dodd-Frank Section 748 also creates strong, new anti-retaliation protections for individuals who provide information to the CFTC.

READ MORE »

The Urgent Need to Re‑establish the Investor Advisory Committee

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Saturday, September 24, 2011
, , ,
More from:
Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement by Commissioner Aguilar available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Recently, the Securities and Exchange Commission (“SEC”) announced the formation of a new Advisory Committee on Small and Emerging Companies (the “ACSEC”), pursuant to the Federal Advisory Committee Act. My vote to approve the establishment of the ACSEC was conditioned on the Investor Advisory Committee [1] being formed and operating prior to, or at the same time as, the formation of the ACSEC.

Advisory committees are an extraordinary way of providing input to the SEC. Establishing an advisory committee grants special access to a small group of representatives that is funded by public taxpayer money. This should not be done lightly. Since 1972, advisory committees have been subject to regulation under the Federal Advisory Committee Act. Concerned about inappropriate influence in public policy and waste of federal resources, [2] the Federal Advisory Committee Act seeks to ensure that resources are allocated responsibly and that the membership of each committee is “fairly balanced in terms of the points of view represented.” [3]

READ MORE »

Contractual Versus Actual Severance Pay Following CEO Turnover

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 23, 2011
, , ,
More from:

The following post comes to us from Eitan Goldman of the Department of Finance at Indiana University and Peggy Huang of the Department of Finance at Tulane University.

In our paper, Contractual Versus Actual Severance Pay Following CEO Turnover, which was recently made publicly available on SSRN, we analyze the bargaining game between the CEO and the board of directors at the time of CEO departure. We find that about 40% of S&P500 CEOs who leave their firm receive separation payments that are in excess of what the firm is legally required to give them based on their existing contract. Furthermore, we find that the average discretionary separation pay is around $8 million – close to 242% of a CEO’s annual compensation. The analysis in the paper aims to uncover the reasons behind this discretionary pay and the source of CEO power exactly at the point in time when the CEO is least likely to have any ability to bargain.

Specifically, we investigate whether CEOs who receive discretionary pay are those who have control over the board of directors or whether discretionary pay represents a tool used by the board of directors in order to help and facilitate an amicable and efficient departure of the incumbent CEO. We hypothesize that in cases when the CEO departure is voluntary, discretionary separation pay represents a governance problem. By contrast, we hypothesize that when the CEO is forced to depart, discretionary separation pay is used to help the company move on from the failed ex CEO to a better one, specifically by reducing the likelihood of a prolonged battle with the departing CEO.

READ MORE »

SEC Concept Release on Use of Derivatives by Investment Companies

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Thursday, September 22, 2011
, , ,
More from: ,

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum. Press releases about the concept releases and proposed rule described below are available here and here.

On August 31, 2011, the SEC issued (i) a concept release (the “Derivatives Concept Release”) soliciting public comment on the use of derivatives by registered investment companies under the Investment Company Act of 1940 (the “ICA”); (ii) an advance notice of proposed rulemaking on the treatment of asset-backed issuers under the ICA (the “Proposed Rule”); and (iii) a concept release (the “Mortgage Concept Release”) seeking public comment regarding the ICA status of companies engaged in the business of acquiring mortgages and mortgage-related instruments.

A brief summary of key topics in each release is below.

READ MORE »

Capital Market Consequences of Managers’ Voluntary Disclosure Styles

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 21, 2011
, , , ,
More from:

The following post comes to us from Holly Yang of the Department of Accounting at the University of Pennsylvania.

In the paper, Capital Market Consequences of Managers’ Voluntary Disclosure Styles, which is forthcoming in the Journal of Accounting and Economics, I examine the capital market consequences of managers establishing an individual disclosure style. While both neoclassical economic and agency theories suggest that managers’ individual preferences should not have an effect on corporate outcomes, several recent academic studies find that managers have styles of their own that they carry from one firm to the other. Anecdotal evidence also suggests that manager credibility matters to financial analysts, who penalize CEOs and CFOs that fail to effectively manage expectations. To the extent that these manager-specific “styles” affect investors’ perceptions of the manager’s overall reputation and credibility, investors should take this into consideration when responding to managers’ disclosure decisions.

READ MORE »

International Corporate Governance Network Honors Bebchuk

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, September 20, 2011
,
More from:

Last week, at the 2011 annual meeting held in Paris of the International Corporate Governance Network (ICGN), Professor Lucian Bebchuk received an ICGN award for excellence in corporate governance. ICGN awards are given annually in recognition of “exceptional achievements in the corporate governance field.”

According to the remarks delivered at the ceremony by the chair of the ICGN awards committee Richard Bennett, Bebchuk received the award “for the volume and quality of his research, particularly around executive compensation and the relationship of governance to value and firm performance. Over two decades this research has provided a base of integrity and learning for scholars, policy makers, and legislators.” Quoting a letter from Robert Monks, Bennett added that Bebchuk “is the epitome of honest, painstaking, unprejudiced analysis; he is in truth an academic icon” and that “[a]ll of us are in his debt.”

The ICGN is a global membership organization of over 500 leaders in corporate governance based in 50 countries. Information about the ICGN awards, and about the past recipients of such awards, is available here.

Court Rules Insolvent Delaware LLC Creditors Cannot Assert Derivative Claims

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, September 20, 2011
, , , ,
More from: ,

The following post comes to us from Mark S. Chehi, a partner in the Corporate Restructuring Group of Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden, Arps memorandum by Mr. Chehi, Allison L. Land, Robert S. Saunders, and Robert A. Weber. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a recent en banc decision by the Delaware Supreme Court in CML V, LLC v. Bax, 2011 Del. LEXIS 480 (Del. Sept. 2, 2011), the Delaware Supreme Court held that creditors of a Delaware limited liability company (LLC) have no standing to assert derivative claims on behalf of an LLC, even if the LLC is insolvent. The ruling rests on the plain language of Section 18-1002 of the Delaware Limited Liability Company Act (the LLC Act), which expressly provides that only members and assignees of an interest in an LLC have standing to bring derivative claims in the right of the LLC.

The Delaware Supreme Court’s decision in Bax makes it clear that creditors of an insolvent Delaware LLC have lesser rights than creditors of an insolvent Delaware corporation because creditors of an insolvent Delaware corporation do “have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.” N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“Gheewalla”). [1]

READ MORE »

The SEC and Banks’ Loan Loss Reserve Policies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, September 19, 2011
, , , , ,
More from: ,

The following post comes to us from Paul Beck and Ganapathi Narayanamoorthy, both of the Department of Accountancy at the University of Illinois at Urbana-Champaign.

In our paper, Did the SEC Impact Banks’ Loan Loss Reserve Policies and Their Informativeness?, which was recently made publicly available on SSRN, we study the joint impact of the SEC’s intervention in bank regulation during the late 1990’s and earnings management. In contrast with traditional bank regulators who focused on understatement (adequacy) of banks’ loan loss reserves, the SEC was concerned with overstatement of loan loss reserves to manage reported income. The SEC’s intervention in banking regulation involved several initiatives. These included investigations of banks that were alleged to have overstated loan loss allowances, the issuance of loan loss guidance in Staff Accounting Bulletin (SAB) 102, and pressuring traditional bank regulators belonging to the Federal Financial Institutions Examination Council (FFIEC 2001) to issue a policy statement affirming SAB 102 guidance. The SAB 102 loan loss guidance requires bank holding companies to use a consistent methodology that can be justified vis-à-vis actual loan loss (charge-off) rates and also imposes responsibility on bank examiners and financial statement auditors to evaluate controls over the loan loss estimation process.

READ MORE »

Proxy Season 2011: A Tipping Point for Social and Environmental Issues?

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, September 18, 2011
, , , , , , ,
More from: ,

The following post comes to us from Heidi Welsh, Executive Director at the Sustainable Investments Institute (Si2), with input from Tim Smith, Senior Vice President at Walden Asset Management, and was adapted from the executive summary of a longer report on the results of the 2011 proxy season published by Si2.

It doesn’t take a majority to make a revolution, particularly when old paradigms have developed deep fault lines. A significant and growing portion of investors think the companies they own need to take more proactive, transparent action on a broad range of social, environmental and governance issues, to protect long-term shareholder value. One measure of support for this view is the global group of 870 investors who manage more than $25 trillion and have signed on to the UN Principles for Responsible Investment. Another is the Carbon Disclosure Project, which now boasts support from investors with $71 trillion of AUM and presses companies to disclose how they are reducing their carbon footprints. Clearly there is an explosion of involvement by investors—“shareowners,” not just passive shareholders—who work to integrate ESG issues into their investment decisions and engagements with companies.

Additional hard evidence of sentiment favoring reform comes from the recently concluded 2011 proxy season, which arguably marks a new tipping point for social and environmental issues. Active shareowners now are voting their convictions more than ever, sending a strong message to company managements and boards. This analysis focuses on the spring “proxy season“ results as one strong indicator of the expansion of investor interest and support for company evolution to higher levels of corporate responsibility.

READ MORE »

Page 15 of 49
1 … 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 … 49