Yearly Archives: 2011

Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, March 28, 2011
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The following post comes to us from Rasha Ashraf of the Department of Finance at Georgia State University; Narayanan Jayaraman, Professor of Finance at the Georgia Institute of Technology; and Harley Ryan of the Department of Finance at Georgia State University.

In the paper, Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? Evidence from Shareholder Proposals on Executive Compensation, which can be found in a forthcoming issue of the Journal of Financial and Quantitative Analysis, we examine the relation between mutual fund votes on shareholder executive compensation proposals and pension-related business ties between fund families and the firms. Mutual funds have a fiduciary responsibility to act in the interests of their shareholders. Shareholder proposals provide one mechanism via which mutual funds can influence firm policies to benefit shareholders. However, mutual funds benefit when they receive pension fund business from firms, which creates a potential conflict of interest that creates an incentive for fund managers to support firm management and to vote against shareholder proposals. Rationally, fund families should trade off the economic benefit of self-interested voting against possible economic losses related to lower portfolio returns, damaged reputations, or potential lawsuits. Shareholder proposals that relate to executive compensation provide an excellent arena in which to examine the influence of pension-related business ties, since these proposals can directly affect the pay and benefits of managers with influence over which fund families receive pension business.

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Supreme Court Holds Corporations Don’t Have Privacy Interest Assertable Under FOIA

Posted by Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Sunday, March 27, 2011
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Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, Peter C. Hein and Maura R. Grossman.

On March 1, 2011, the U.S. Supreme Court ruled in Federal Communications Commission v. AT&T Inc. that Freedom of Information Act Exemption 7(C) – which exempts from required public disclosure information “compiled for law enforcement purposes” the disclosure of which “could reasonably be expected to constitute an unwarranted invasion of personal privacy” – could not be invoked to protect against disclosure of records produced to an agency on the grounds that disclosure would constitute an unwarranted invasion of personal privacy of a corporation.

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Florida SBA Confronts Recent Corporate Governance Issues at Home and Abroad

Posted by Michael McCauley, Florida State Board of Administration, on
Saturday, March 26, 2011
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Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on an excerpt from the SBA’s 2011 Corporate Governance Report by Mr. McCauley, Jacob Williams and Lucy Reams. Mr. Williams and Ms. Reams are Corporate Governance Manager and Senior Corporate Governance Analyst, respectively, at the SBA. The complete report is available here; further information regarding the SBA’s governance activities, including proxy voting data, is available here.

Global Proxy Voting

In 2010, the SBA worked with The Corporate Library to analyze its proxy voting among nine externally managed foreign equity portfolios totaling approximately $9 billion. The vote audit examined a total of 33,729 individual ballot items (proxy voting decisions) across 257 distinct voting categories. The purpose of the foreign equity proxy vote audit was to evaluate the external managers’ voting activities as well as to benchmark those voting decisions against similar SBA votes and those of a major corporate governance research provider. The vote audit examined aggregate voting results, voting by each individual manager, and benchmarked external manager voting against SBA internal voting decisions.

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Did Structured Credit Fuel the LBO Boom?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, March 25, 2011
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The following post comes to us from Anil Shivdasani, Professor of Finance at the University of North Carolina, and Yi Hui Wang of the Department of Finance at the Chinese University of Hong Kong.

In our forthcoming Journal of Finance paper, Did Structured Credit Fuel the LBO Boom? we study how large shifts in the availability of credit affected the corporate use of leverage by examining LBO transactions that rely heavily on debt financing. We argue that developments that led to the growth of structured credit contributed to increased credit supply that at least partially fueled the recent LBO boom. Our evidence highlights important linkages between structured credit, the dual role of banks in the structured credit markets as loan originators and underwriters, and the corporate use of leverage.

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Lucian Bebchuk Elected to Norilsk Nickel’s Board of Directors

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, March 24, 2011

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According to a press release by MMC Norilsk Nickel, Harvard Law School Professor Lucian Bebchuk was elected for the Company’s Board of Directors as an independent director. The election occurred in an Extraordinary Shareholder Meeting taking place earlier this month. In a press release, UC RUSAL, the world’s largest aluminum producer and owner of a 25% stake in MMC Norilsk Nickel, referred to Bebchuk as a “a landmark figure for international institutional investors” and expressed hope that the election “will help improve corporate governance … and introduce proper practices and standards for the protection of minority shareholders.”

MMC Norilsk Nickel, a company incorporated under the laws of the Russian Federation, is the largest diversified mining and metals company in Russia, the world’s largest producer of nickel and palladium and one of the world’s largest producers of platinum, rhodium, copper and cobalt. In addition, MMC Norilsk Nickel produces a large number of by-products, including gold, silver, tellurium, selenium, iridium and ruthenium. As well as its key production units in the Polar and Kola Peninsula regions of Russia, MMC Norilsk Nickel assets include operations in Finland, Australia, Botswana and South Africa. MMC Norilsk Nickel’s shares are traded at MICEX and RTS. ADRs on the company’s shares are traded on the over-the-counter market in the United States and on the London and Berlin stock exchanges. MMC Norilsk Nickel’s current market capitalization exceeds $40 billion.

Norilsk Nickel’s press release about the board election results can be found here; Rusal’s press release on the subject can be found here; a WSJ story about the election is available here. More information about Norilsk Nickel is available here.

Proposed Rule on Incentive-Based Compensation at Financial Institutions

Posted by Joseph E. Bachelder III, Law Offices of Joseph E. Bachelder, on
Thursday, March 24, 2011
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Joseph Bachelder is founder and senior partner of the Bachelder Law Firm. This post is based on an article by Mr. Bachelder that first appeared in the New York Law Journal.

On Feb. 7, 2011, the Federal Deposit Insurance Corporation (FDIC) approved a proposed rule regarding incentive-based compensation at covered financial institutions pursuant to Section 956 of the Dodd-Frank Wall Street and Consumer Protection Act, 12 U.S.C. §5641 (2010). Subsequently, the National Credit Union Administration (NCUA) (Feb. 17) and the Securities and Exchange Commission (SEC) (March 2) approved their own versions of the proposed rule (each version being very much the same as the FDIC’s). Four other agencies are expected to approve their own similar versions of the proposed rule shortly. [1]

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Proxy Advisory Business: Apotheosis or Apogee?

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Wednesday, March 23, 2011
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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 Latham & Watkins Corporate Governance Commentary by Mr. Nathan and James D.C. Barrall.

Introduction

Proxy advisory firms, particularly the two dominant players — ISS and Glass Lewis — seem to many observers to be in the proverbial cat-bird seat. [1]

The closure of Proxy Governance, Inc. at the end of 2010 gave these two firms a duopoly, which should be good for their businesses.

The number of shareholder votes at public companies, which is the bread and butter of the proxy advisory business model, has increased markedly over the past decade, and will continue to grow with the advent of mandatory Say on Pay and Say on Pay frequency votes, not to mention proxy access if it survives its pending judicial review.

The combined influence of these two proxy advisory firms on shareholder voting is often determinative of the outcome, particularly in contested vote situations. [2]

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Investor Protection and Its Effects on Investment, Finance, and Growth

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, March 23, 2011
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The following post comes to us from David McLean of the Department of Finance at the University of Alberta, Tianyu Zhang of the Accounting Department at the Chinese University of Hong Kong, and Mengxin Zhao of the Department of Finance at the University of Alberta.

In the paper, Why Does the Law Matter? Investor Protection and its Effects on Investment, Finance, and Growth, forthcoming in the Journal of Finance, we study how investor protection affects firm-level resource allocations. We test for these effects using both ex-ante and ex-post measures of efficiency. We conduct our analyses in a large sample of firms from 44 countries during the period 1990 to 2007. We show that the relations between q and investment and q and external finance are stronger in countries with stronger investor protection laws. These findings are consistent with the notion that investor protection laws encourage accurate share prices, efficient investment, and better access to external finance.

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The Case for Modernizing Section 13 Beneficial Ownership Reporting Rules

Posted by Eric S. Robinson and Theodore N. Mirvis, Wachtell, Lipton, Rosen & Katz, on
Tuesday, March 22, 2011
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Eric Robinson is Of Counsel and Theodore Mirvis is a Partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Mirvis and Mr. Robinson.

Wachtell, Lipton, Rosen & Katz filed a rulemaking petition with the Securities and Exchange Commission on March 7, 2011 with respect to the beneficial ownership reporting rules found in Section 13(d) of the Securities Exchange Act of 1934. Our request highlights the urgent need to amend the existing reporting framework to keep pace with market realities and abuses, in particular by closing the Schedule 13D ten-day window between crossing the 5% disclosure threshold and the initial filing deadline, and adopting a broadened definition of “beneficial ownership” to fully encompass alternative ownership mechanisms. Recent maneuvers by activist investors both in the U.S. and abroad have demonstrated the extent to which current reporting gaps may be exploited, to the detriment of issuers, other investors, and the market as a whole.

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Federal Agencies Propose Interagency Rule on Financial Institution Compensation

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, March 22, 2011
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Editor’s Note: Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Kyoko Takahashi Lin and Nora M. Jordan summarizing a proposed rule on incentive compensation under the Dodd-Frank Act, which is available here.

My partners Kyoko Lin and Nora Jordan have written a memorandum that analyzes a proposed interagency rule issued under Section 956 of the Dodd-Frank Act. The proposed rule would impose significant new requirements relating to incentive-based compensation that would apply to a wide range of financial institutions, including some, such as broker-dealers and investment advisers, that have never had their compensation subject to governmental requirements, and others, such as uninsured branches and agencies of a foreign bank, that are not listed in the statute.

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