Yearly Archives: 2011

What Board Members Should Know About Communicating Corporate Social Responsibility

Posted by Matteo Tonello, The Conference Board, on
Tuesday, April 26, 2011
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Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Shuili Du, C.B. Bhattacharya and Sankar Sen.

Since creating stakeholder awareness is a key prerequisite for reaping the strategic benefits of any business initiative, it is imperative for board members and senior executives instituting a social responsibility program to have a deeper understanding of the key issues related to CSR communication. This report discusses what to communicate (i.e., message content) and where (i.e., message channel), as well as the major factors (internal and external to the organization) that affect the effectiveness of CSR communications.

Corporate social responsibility (CSR), defined broadly as “a commitment to improve [societal] well-being through discretionary business practices and contributions of corporate resources,” occupies a prominent place on the global corporate agenda in today’s socially conscious market environment. [1] More than ever, companies are devoting substantial resources to various social and environmental initiatives—ranging from community outreach and neutralizing their carbon footprint to socially responsible business practices in employment, sourcing, product design, and manufacturing.

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The Effect of Managerial Traits on Corporate Financial Policies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 25, 2011
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The following post comes to us from Ulrike Malmendier of the Economics Department at the University of California, Berkeley, Geoffrey Tate of the Finance Department at UCLA, and Jon Yan of Stanford University.

In our forthcoming Journal of Finance paper, Overconfidence and Early-life Experiences: The Effect of Managerial Traits on Corporate Financial Policies, we provide evidence that managers’ beliefs and early-life experiences significantly affect financial policies, above and beyond traditional market-, industry-, and firm-level determinants of capital structure. We begin by using personal portfolio choices of CEOs to measure their beliefs about the future performance of their own companies. We focus on CEOs who persistently exercise their executive stock options late relative to a rational diversification benchmark. We consider several interpretations of such behavior — including positive inside information — and show that it is most consistent with CEO overconfidence. We also verify our measure of revealed beliefs by confirming that such CEOs are disproportionately characterized by the business press as “confident” or “optimistic,” rather than “reliable,” “cautious,” “practical,” “conservative,” “frugal,” or “steady.”

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The Loss Absorbency Requirement and “Contingent Capital” Under Basel III

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, April 24, 2011
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The following post comes to us from Gregg Rozansky, counsel in the Financial Institutions Advisory & Financial Regulatory Group of Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication; this publication previously appeared in Reuters EuroWatch.

The Basel Committee on Banking Supervision recently finalized minimum requirements for regulatory capital instruments under Basel III. For internationally active banks, these include a requirement that so-called Tier 1 instruments other than common stock as well as all Tier 2 instruments include a feature requiring a “write-off” or conversion into common stock. The requirement is one of several important international developments that have broadened interest in bank-issued contingent capital securities.

Under the Basel III contingent capital requirement, the home country supervisor of an internationally active bank would have the authority to trigger a write-off or a conversion of non-common Tier 1 and Tier 2 instruments issued by the bank. A trigger event may be declared as deemed necessary to help prevent the issuer from becoming insolvent. For purposes of Basel III, non-common Tier 1 capital instruments generally consist of perpetual preferred stock and perpetual debt instruments where the issuer has complete discretion to cancel distributions/payments on the instrument. Tier 2 capital mainly consists of subordinated debt with a minimum original maturity of at least five years.

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Facilitating Real Capital Formation

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Saturday, April 23, 2011
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Council of Institutional Investors Spring Meeting; the complete remarks, including footnotes, are 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.

Today, I want to talk about capital formation. For over 30 years, I advised many clients as to their capital raising efforts in order to grow their businesses, and I worked with institutions that held significant stakes in companies who grew their operations by making better products, and selling more of them.

I have been growing increasingly concerned about the discussion that is taking place in our country regarding capital formation. This discussion seems to confuse the singular act of capital raising with the much broader concept of capital formation. Moreover, this discussion fails to take into account the importance of disclosure in helping investors assess risks and make informed investment decisions. Disclosure leads to an informed investor – and informed investors are ones who will make investment decisions that collectively, in the aggregate, will yield productive benefits and growth to the real economy.

I know you understand exactly what I mean. The Council is an association of members who have a long-term stake in the U.S economy. You are self-described as the “patient capital” of the markets because, in general, you have “30-year investment horizons and heavy use of indexing strategies.” You understand that for most investments to make money, the company generally requires organic or strategic growth over a period of time.

I share this long-term view.

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Optimal Capital Structure

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, April 22, 2011
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This post comes to us from Jules van Binsbergen of the Department of Finance at Northwestern University and Stanford University, John Graham, Professor of Finance at Duke University, and Jie Yang of the Department of Finance at Georgetown University.

In our paper, Optimal Capital Structure, which was recently made publicly available on SSRN, we develop a method that can be used to determine optimal capital structure for any given firm. Being able to make specific, firm-by-firm debt policy recommendations is an important addition to the current state of affairs. Though much progress has been made in capital structure research, traditional approaches neither explicitly separate out the benefits and costs of debt to facilitate estimation optimal debt ratios, nor precisely quantify the cost of suboptimal leverage.

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More Protectionism and Paternalism at the UK Panel on Takeovers and Mergers

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Thursday, April 21, 2011
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Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn Client Alert by Selina Sagayam; a previous post discussing this topic is available here.

Introduction — The Panel Stands Firm

In late November 2010, we published an article on the policy statement of the UK Panel on Takeovers and Mergers (Panel) which set out the ground work for changes to the rules governing the conduct of public takeovers in the UK as embodied in the UK Code on Takeovers and Mergers (Code). [1] Last week, the Panel published a public consultation paper (PCP 2011/1) which sets out the detailed proposed amendments to the Code [2] as trailed in our earlier article. In summary, notwithstanding an outcry from seasoned market participants (in particular the advisory community) on some of the proposed changes which are perceived as having a detrimental impact on the openness of the UK M&A market, disappointingly, the Panel has not shifted from its position as set out late last year on the fundamentals/principles of its new approach on key areas such as the ‘put up shut up’ (PUSU) regime and offeree protection arrangements. We examine below certain critical features of some of these proposed changes.

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Internal Control Weakness and Bank Loan Contracting

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, April 20, 2011
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The following post comes to us from Jeong-Bon Kim, Professor of Accountancy at City University of Hong Kong; Byron Song of the Department of Accounting at Concordia University; and Liandong Zhang of the Department of Accountancy at City University of Hong Kong.

In our paper, Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures, forthcoming in The Accounting Review, we compare various features of loan contracts between firms with ICW and those without ICW. To provide evidence of the impact of ICW on various features of loan contracts, we construct a sample of 3,164 loan facility–years for borrowers that filed SOX 404 disclosures with the SEC during 2005–2009. We then compare various features of loan contracts with ICW borrowers with those with non-ICW borrowers, after controlling for borrower- and loan-specific characteristics deemed to affect the contract terms.

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Activists Target Companies with Market Caps over $50 Billion

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, April 19, 2011
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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. This post is based on a Wachtell Lipton firm memorandum.

In a speech to the Council of Institutional Investors recently, Nelson Peltz, one of the most successful of the activist investors, said the recent changes in corporate governance would enable him to make investments in the heretofore “untouchables”—companies with market capitalizations over $50 billion. Mr. Peltz noted that the new governance rules give activists more tools with which to pressure companies, noting that larger companies provide bigger profit opportunities than smaller companies.

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Renault Case Illustrates Dangers of Misleading Whistleblower Claims

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, April 19, 2011
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The following post comes to us from Alan Klein, a Partner and member of the Corporate Department at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

Earlier this year, following an internal investigation into allegations of industrial espionage, Renault SA (“Renault”), the giant French car maker, fired three senior employees with great public fanfare. But this week, after an inquiry by French officials reportedly found no evidence substantiating Renault’s findings, Renault issued a public apology to these employees and conceded it had made a mistake. Based on published accounts, it appears that Renault might have been the victim of a hoax involving an unfounded whistleblower allegation designed to prompt the car maker to spend money pursuing a wayward internal investigation.

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Court Holds No Duty to Include a “Fiduciary Out” in Extra-ordinary Transaction Agreements

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on
Monday, April 18, 2011
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Edward Herlihy is a partner and co-chairman of the Executive Committee at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Herlihy and David E. Shapiro.

On March 30, 2011, the California Court of Appeals affirmed a long standing principle of California law that boards of directors of California companies can lawfully bind themselves to complete an extra-ordinary corporate transaction such as a merger or recapitalization without the need for a “fiduciary out” and without an independent shareholder vote. Monty v. Leis, No. B225646 (Cal. Ct. App. March 30, 2011).

Pacific Capital Bancorp (“PCB”), parent of Pacific Capital Bank, suffered losses in the real estate loan market that resulted in a write-down of its assets and was met with a series of banking regulatory orders which required that PCB raise capital. After seeking additional capital from numerous sources, PCB entered into an exclusive investment agreement with the Ford Financial Fund, LP (“Ford”) a fund affiliated with renowned bank investor Gerald Ford. Ford agreed pursuant to the investment agreement to inject $500 million of capital into the bank to allow it to meet regulatory requirements and grow its business. As a result, Ford would own over 80% of PCB’s common stock. PCB relied on the “financial distress” exception to the NASDAQ shareholder vote requirements to issue common and convertible preferred shares to Ford. After issuance, Ford voted the common shares it held to amend the articles of incorporation to authorize additional shares to be used to satisfy the conversion feature in the preferred stock. Two shareholders filed suit seeking to enjoin the transaction on a number of grounds and the trial court denied the injunction.

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