Yearly Archives: 2011

Sources of Gains in Corporate Mergers

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, March 21, 2011
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The following post comes to us from David Becher, Associate Professor of Finance at Drexel University, Harold Mulherin, Professor of Banking and Finance at the University of Georgia, and Ralph Walkling, Stratakis Chair in Corporate Governance at Drexel University.

In the paper, Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry, forthcoming in the Journal of Financial and Quantitative Analysis, we provide new tests of the synergy, collusion, and anticipation hypotheses using stock and product pricing data from the utility industry in the United States. The utility industry has been omitted from prior analysis of synergy and collusion in mergers and thus provides out-of-sample tests of these hypotheses. Moreover, features of the industry allow ready identification of geographic rivals and thereby facilitate clean tests of the competing hypotheses.

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The Fifth Analyst Call: Investors Seek Greater Communication with Directors

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, March 20, 2011
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The following posts comes to us from Deborah Gilshan, Corporate Governance Counsel at Railpen Investments, and Elizabeth McGeveran, Senior Vice President at F&C Asset Management. A statement with further information is available here.

A group of major and influential global institutional investors from North America, Europe and Australia , led by the UK’s Railpen Investments and F&C Asset Management, are seeking to build open and constructive dialogue with US boards of directors through a concrete, easy-to-implement solution – an idea we are calling a “Fifth Analyst Call.”

In a nutshell, companies would host an open call for their investors prior to the annual meeting – a fifth call added onto the calendar of quarterly analyst calls, with the focus on corporate governance. Prior to the annual meeting, investors consider important details related to the issuer, including whether or not to endorse a company’s compensation plan and the actions of the directors during the year. For their part, issuers produce a detailed proxy statement which represents the considered decisions of officers and directors. This is the natural time for a substantive, practical discussion about corporate governance issues, including compensation. The proxy statement offers a perfect opening for dialogue between shareholders and independent directors such as the lead director.

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Florida SBA Seeks to Use Proxy Voting to Promote Good Governance Practices

Posted by Michael McCauley, Florida State Board of Administration, on
Saturday, March 19, 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.

The State Board of Administration (SBA) supports the adoption of internationally recognized governance practices for well-managed corporations including independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, annually seek shareowner ratification of external auditors, and implement well designed incentive plans. As noted in a recent Fitch Ratings research piece, “Assessing an issuer’s governance practice begins with its board of directors. An independent, active, knowledgeable, and committed board of directors signals a robust governance framework. A board that is not committed to fulfilling its fiduciary responsibilities can open the door for ineffective, incompetent, and in some cases, unscrupulous management behavior.”

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Corporate Governance Adrift

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Friday, March 18, 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.

Having served as a member of the NYSE committee that created the NYSE’s post-Enron corporate governance rules, I have watched with dismay as those rules have been misunderstood, misapplied and polluted by one-size-fits-all “best practices” invented by proxy advisory services and other governance activists. In the recent Hewlett-Packard case, ISS took the position that the participation by the CEO in the search for new directors tainted the process and warranted a recommendation by ISS for a no vote on the reelection of members of Hewlett-Packard’s nominating and governance committee. See March 11, 2011 memo. Apart from the fundamental policy issue as to whether the principal purpose of the board of directors is to monitor the performance of the CEO or to advise as to strategy, the Hewlett-Packard case raises the equally important issue of how the board should function on a day-to-day basis.

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Does Governance Travel Around the World?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, March 18, 2011
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The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University’s McDonough School of Business; Isil Erel of the Finance Department at The Ohio State University; Miguel Ferreira of the NOVA School of Business and Economics; and Pedro Matos of the Finance Department at the University of Southern California.

In our paper Does Governance Travel Around the World? Evidence from Institutional Investors, forthcoming in the Journal of Financial Economics, we examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003-2008.

We find that international institutional investors export good corporate governance practices around the world. In particular, foreign institutional investors and institutions from countries with strong shareholder protection are the main promoters of good governance outside of the U.S. Our results are stronger for firms located in civil-law countries. Thus, international institutional investment is especially effective in improving governance when the investor protection in the institution’s home country is stronger than the one in the portfolio firm’s country.

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ISS Goes with Form over Substance

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Thursday, March 17, 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.

The decision by ISS, reported in its March 2, 2011 proxy advisory for the annual meeting of Hewlett-Packard, to recommend against the reelection of members of the nominating committee because of the participation of the Hewlett-Packard CEO in the search for new directors, reflects another mechanistic decision undermining the ability of a board to function collegially. Like many of the positions taken by ISS, it exalts the board’s monitoring functions over its equally important strategic advisory functions.

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The Effective Chair-CEO Relationship: Insights from the Boardroom

Posted by Stephen Davis, Millstein Center for Corporate Governance & Performance, Yale School of Management, on
Thursday, March 17, 2011
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Stephen M. Davis is the Executive Director of Yale University School of Management’s Millstein Center for Corporate Governance and Performance. This post discusses a report from the Millstein Center by Elise Walton, available here.

The number of U.S. companies that separate the chairman and CEO roles is at a historic high: 40 percent of the S&P 500 now separate the roles, up from 23 percent a decade ago, according to Spencer Stuart. A new report published by Yale’s Millstein Center for Corporate Governance and Performance, The Effective Chair-CEO Relationship: Insight From the Boardroom, examines how this increasingly common relationship works. Based on interviews with CEOs, non-executive Chairs, and stakeholders, the report aims to understand what constitutes a winning relationship between two individuals, each successful in his or her own right. As this leadership structure becomes more prevalent, these insights should be useful to those working together in these interdependent roles.

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Does Takeover Activity Cause Managerial Discipline? Evidence from International M&A Laws

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, March 16, 2011
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The following post comes to us from Darius Miller, Professor of Finance at Southern Methodist University, and Ugur Lel of the Federal of the Federal Reserve Board.

In the paper Does Takeover Activity Cause Managerial Discipline? Evidence from International M&A Laws, which was recently made publicly available on SSRN, we examine if the market for corporate control improves corporate governance. Theory suggests that the threat of takeover is one of the most important external mechanisms for aligning the interests of managers and shareholders. While a large empirical literature analyzes the effects of takeover activity on managerial discipline, it has not been entirely successful in establishing whether an active market for corporate control enhances managerial discipline and often finds mixed results. Partly, this is because many studies rely on sources of variation in the threat of takeover that can generate serious endogeneity and omitted variable biases. For example, tests that employ the mean level of takeover activity as a proxy for the threat of takeover suffer from potential omitted variable biases since overall takeover activity is likely to be accompanied by contemporaneous macroeconomic shocks that could jointly explain management turnover. Further, tests that employ takeover defenses as a proxy for takeover threats suffer from endogeneity concerns as they are often established at the discretion of the firm.

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The State of Engagement between U.S. Corporations and Shareholders

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, March 15, 2011
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The following post comes to us from Jon Lukomnik of the Investor Responsibility Research Center Institute and Marc Goldstein of Institutional Shareholder Services, and is an abridged version of a study conducted by ISS for the IRRC Institute, which is available here.

Study Summary

At a time when engagement is front and center in the public debate about corporate America, this study provides the first-ever benchmarking of the level of engagement between investors and public corporations (issuers) in the United States. As evidenced by the provisions of the Dodd-Frank legislation, various SEC rule-makings and the lawsuits contesting them, engagement has emerged as a central governance process for public companies in America. Despite that fact, there has never been a comprehensive picture of investor/corporate engagement and thus no consensus definition of engagement. This study attempts to rectify that lack. It surveyed 335 issuers of stock and 161 investors, including both asset owners (e.g. pension funds, trusts, etc.) and asset managers.

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SEC Disclosure and Corporate Governance: Financial Reporting Challenges for 2011

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, March 15, 2011
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The following post comes to us from Catherine T. Dixon, a member of the Public Company Advisory Group at Weil, Gotshal & Manges LLP, and is based on a Weil Gotshal Alert.

Companies now focusing on preparation of the upcoming annual report have the benefit of wide-ranging disclosure guidance issued in 2010 and early 2011 by the SEC and its Staff. While many of the issues have been highlighted repeatedly since the financial crisis began to erupt in 2007, the significance of the latest round of guidance has been underscored by a far more aggressive SEC enforcement posture in the financial reporting area. [1]

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